Wages and the composition of experience.

• Author: Goldsmith, Arthur H.

1. Introduction

   The human capital model (Becker 1962; Mincer 1974) typically categorizes skills as being "firm specific," or those that increase productivity in only one firm, and "general," or those that increase productivity in more than one firm. Recent research by Loewenstein and Spletzer (1998) finds that employer-financed forms of training have positive impacts on wages at subsequent jobs, suggesting that these forms of training are portable across employers, or are general. Related studies by Neal (1995) and Parent (2000) challenge the traditional notion of skills being either firm specific or general, however. They find that the wage returns to tenure at the current job are similar to the wage returns to work experience at prior jobs in the same industry as currently employed and conclude that skills are "industry specific" rather than firm specific. Also, earlier research by Shaw (1984) indicates that skills acquired in a particular occupation are portable across employers, or that skills are "occupation specific" rather than firm-specific.

   Taken together, these studies provide substantial evidence that skills are not necessarily firm specific but are likely to be specific to either an industry or an occupation. These findings suggest that reexaminations of theoretical models of human capital and job mobility are required, as these models generally focus on the match between a worker and firm rather than between a worker and a particular line of work, or a "career." For example, research by Neal (1999) indicates that workers typically search initially for a career and subsequently search between firms once a career match is found.

   Yet while these prior studies indicate that certain skills appear to be more valued by subsequent employers than others, there remains considerable uncertainty as to what types of skills are the most transferable and what sets of skills constitute a career. In particular, the concept of industry-specific skills can be very different than that of occupation-specific skills. For instance, suppose an individual currently works as a residential real estate agent. Given that there are skills that are idiosyncratic to the real estate industry, the real estate agent might be able to easily move from residential sales into working as an accountant with a real estate firm or doing administrative work for a mortgage insurance company. This type of transition involves a change in occupation but not in industry, and the wage returns to prior experience as real estate agent should be equivalent to that of current job tenure in another job in the real estate field if prior experience truly is industry specific.

   Conversely, the individual might find that the sales skills acquired as a real estate agent are very transferable and may move into another area of sales, such as the sale of pharmaceuticals, books, or steel. This type of transition involves a change in industry but not in occupation. The wage returns to prior experience as a realtor will be the same as that of current tenure in another sales job if skills actually are occupation specific.

   While industry and occupation categories are not always readily discernable and many job changes will likely involve a change in both industry and occupation, making a distinction between industry-specific versus occupation-specific skills is important in trying to understand the skill acquisition process and in trying to get a handle on what is implied by the term "career." In this paper, an attempt is made to disentangle the contribution of industry experience and occupation experience to wages. In particular, prior labor market experience is segmented into mutually exclusive categories based on industry and occupation. This exercise sheds light on whether experience in the same industry or in the same occupation is rewarded to a greater extent than experience in other industries or in other occupations.

   The results indicate that the wage returns to prior experience in either the same industry or the same occupation are equivalent to the wage returns to current job tenure. The return to prior experience acquired outside both the person's current industry and occupation is lower than the returns to job tenure and to the other forms of experience, however. This finding suggests that, other than time spent working outside the current industry and occupation, experience is homogeneous. It is important to point out, however, that a large proportion of workers' employment histories, particularly early in their careers, is spent outside the current industry and occupation. The estimates of the wage returns to alternative types of experience provide evidence on the benefits, and hence opportunity costs, of different employment paths.

   The remainder of the paper is organized as follows. Section 2 describes the data and the empirical strategy adopted. The procedure used to segment prior workplace experience by both industry and occupation is discussed in this section, and evidence on the distribution of prior experience is offered. Section 3 presents wage equation estimates under alternative assumptions about the degree of homogeneity of prior workplace experience. Some extensions of the findings related to employer learning and worker ability are explored in section 4. Section 5 provides a robustness test of the results in regard to the issue of unobserved heterogeneity, while section 6 presents the conclusions.

2. Data and Empirical Strategy

   What is the monetary return to alternative forms of skill acquisition, including different types of prior workplace experience? To answer this question, we estimate different models of wage determination. These equations are characterized by varying degrees of aggregation to determine the perceived relation between alternative workplace experiences and productivity.

   Data

   The analysis is based on the 1996 release of the National Longitudinal Survey of Youth (NLSY). The NLSY is a panel study of men and women who were between the ages of 14 and 22 in 1979 and who have been interviewed annually from 1979 to 1994. After 1994, the survey moved to a biennial cycle. A key feature of the NLSY is that it garners information in an event history format, in which dates are collected for the beginning and ending of important life events. In particular, starting dates and ending dates for all jobs are recorded, so it is possible to create fairly precise measures of current job tenure and prior work experience.

   The sample used here is restricted to white males who were working for pay at the 1996 interview with nonmissing information on the variables used in the analysis (details on sample creation are provided in Appendix A). It should be mentioned that over the 1979-1996 waves of the NLSY, information on industry and occupation is consistently available only for those jobs that involved working at least nine weeks and 20 hours per week. (1) Consequently, the sample of workers is limited to those who held a job that met these restrictions at some time over the interview year. Also, the tenure and prior experience variables represent the number of weeks in which a person worked more than 20 hours per week (divided by 50). For episodes in which individuals held multiple full-time jobs simultaneously, the job that involved the most hours worked per week was used when generating the experience variables.

   All variables that refer to a job, including industry and occupation, are measured as of the start of the job. It should be mentioned that some workers report changes in industry and occupation without changing jobs. While these changes may be more likely to occur for occupation changes for a given employer, it is impossible to distinguish between a "real" occupation change and a reporting or coding error. These types of misclassification errors are discussed by Neal (1999). (2)

   Table 1 provides a description of the key work experience variables used in this analysis. Means of the prior experience variables are provided at the one- and three-digit industry/occupation level in Table 1. Means for all the variables used in the empirical analysis are provided in Appendix B. NLSY respondents were ages 31 to 39 in 1996 and on average had more than 14 years of total experience, spending close to six years on the current job and about eight years with prior employers. At the one-digit level, about three out of the eight years of prior work experience, or about one-third of the total, are spent in the same occupation. Similarly, about one-third of prior work experience is spent in the same industry. Using more disaggregated measures of prior experience based on both industry and occupation (same industry/same occupation, same industry/different occupation, different industry/same occupation, and different industry/different occupation) indicates that individuals spend only about a year and a half in the same industry and occupation as their current job, while about four years, or over half of all prior work experience, is spent in a completely different occupation and industry as the current job. The means at the three-digit level are even more dramatic, as they indicate that close to three-quarters of all prior experience is spent in jobs that are of a different industry and occupation than the current job.

   These percentages are consistent with other findings that indicate that there is a great deal of workplace mobility among young workers. Other figures using the NLSY indicate that individuals hold more than nine jobs between the age of 18 and their mid-30s (Bureau of Labor Statistics 2000). The industry/occupation work experience averages reported in Table 1 suggest that young workers not, only "job shop" but also "career shop" in the sense that changes in industry, occupation, and both industry and occupation are very common. The average tenure figure of approximately six years, however, suggests that these workers do...