Did You Know? About 40% of your lifetime earnings is accounted for by the skills you learn on the job

Much time and effort has been devoted to examining the importance of education to development of human capital, and a new McKinsey report now offers a unique economic view on what happens to human capital after people enter the workforce.

On average, human capital accounts for two-thirds of an individual’s wealth, with almost 60% of that value linked to on-the-job experience, says the report entitled Human Capital at Work: The Value of Experience, indicating ‘Great Experience’ as an antidote to the ‘Great Resignation’.

The report from the McKinsey Global Institute (MGI) and McKinsey’s People & Organisation Performance Practice has, for the first time, quantified the economic value of work experience or on-the-job learning in the lifetime earnings of individuals, and how they accumulate new skills at the workplace to build their human capital.

The report analysed a data set of 1 million (completely de-identified) professional work histories in India, in addition to those in three other countries (the US, the UK, and Germany) to understand how work experience adds value over time – a less studied stage of the process: the learning, acquisition and deployment of skills that continues over a working life.

For example, it found that people who started off with low pay but became upwardly mobile and earned more over their lifetime did so by making bigger leaps to roles with new skills – a trend playing out in real time with the great attrition and current labour shortages.

The research also sends important messages to employers looking to get the best out of their people, as it found that 87% of role moves involved people switching employers (as opposed to moving roles within organisations), highlighting that companies need to attract talent by delivering the learning and advancement workers want.

“This report tells a story of possibilities. People’s lifetime earnings aren’t necessarily dictated by their education. Those who start with disadvantages because of a lack of qualifications can make up ground by accumulating skills. Companies have an important role to play in helping people achieve this. They should be wary of typecasting people and instead focus on their capacity to learn and evolve,” says Anu Madgavkar, a partner with the McKinsey Global Institute.

Economic value of work experience

Work experience accounts for more than half of the average person’s lifetime earnings but often far more for people with less education.

Experience accounts for 40-43% of lifetime earnings in the US, the UK, and Germany, and 58% in India, where fewer people have higher education. The differences are striking across occupations.

People who start in roles requiring education and credentials earn more, and their entry-level skills continue to drive most of their earnings over a lifetime (65% for physicians and lawyers).

But for individuals involved in manual labour, the ‘experience effect’ matters more. For example, for tile-setters or a counter worker, experience on the job accounts for more than 70%.

Movement often pays

Role moves help workers to accumulate skills and experience, and it was seen that the average person in the dataset changed roles every four years.

Three out of five start and end their careers in a different occupation and acquired 26% new skills with each role move.  About half of all role moves were pay-decreasing. This could happen by choice or because someone is fired or laid off. However, the pay-increasing moves led to 45% higher salaries on average.

Bolder role moves deliver bigger boosts

Some workers jump substantially from lower starting points to higher earning brackets. This group seems to use work experience effectively, and took on new jobs with distinctly new skills. Many people have tough starting points because of educational gaps or other disadvantages.

But almost 25% of workers surveyed in India managed to move up one or more earning quintiles.

Experience accounted for 80% of their lifetime earnings (vs only 55% for those who stayed flat or dropped down). This group made more frequent and bolder role moves, acquiring 30% new skills with each role move, compared to only 20% for the cohorts that stayed flat.

The research identified four groups of workers based on movement patterns - these could be called: Experience seekers, Early movers, Late movers, and Lock-ins.

Experience seekers make more frequent and bolder moves throughout their careers, and have the highest growth in lifetime earnings. Early movers make big moves early, then settle in and have higher overall lifetime earnings.

Individuals get the greatest lift from spending time early in a career with an effective organisation. Overall organisation health (i.e., good management practices), time spent on training and in-role coaching, and internal growth opportunities are what set these companies apart (while size does not).

How companies can help develop employees' human capital

• Recognise the knowledge, skills and potential candidates already have, and recruit based on skills rather than college degrees. Be less constrained about recruiting from traditional backgrounds, open to people with unconventional career paths.
• Make yourself attractive to the best external candidates. Create lateral internal career paths in addition to linear paths. Set the expectation that leaders should develop people to move to other roles. Define and broaden future career pathways for each role
• Strengthen coaching, career mentoring and apprenticeship along with more effective structured learning, emphasising early tenure and the role of the first/new manager.