We estimated the salary value of work experience and of education and compared the two by combining measurements from nine respected sources.
Here’s the surprise we discovered: work experience explains more than eight times as much variation in salary as education explains. This is news you can use!
In most fields, and especially in the technical fields Massachusetts has in abundance, experience contributes much more to salary than education does.
Across industries, occupations, job titles, and for both sexes, experience had more than eight times the explanatory power of education in determining salary (21.1 percent to 2.6 percent).
Even more surprising, for experienced workers, education is not among the top-30 explanatory variables affecting salary. This observation comes for a study of 200 variables across 4,000 observations examined in a 2018 study of advertisements for experienced workers to fill over 4,000 technical positions in Spain.
Project Management Skills Are Valuable.
Two project management-related variables—project leadership (ranked second) and PMP (Project Management Professional) certification (ranked fifth)— when combined place second behind work experience as determining salary. Project management skills are usually learned on the job, so we counted them as work experience in our estimate.
The Salary Value of Education Diminishes Rapidly
Education’s usefulness in generating salary starts high for new graduates. Once they start working, their work experience grows rapidly in value while their education declines in relative value. Even so, education never loses all its salary value. New Jobs estimates that the half-life of the salary value of a college education is 3.5 years. That means the value of salary attributable to education declines 50 percent every 3.5 years.
In practice, education is virtually always taken into account during hiring. As time passes, education affects pay levels less than work experience does in the eyes of those who make hiring decisions.
The true salary benefit of formal education is cumulative, not year to year. Advanced education provides steadier duration of employment and a consistently better pool of financially attractive opportunities in one’s field.
Education Acts Like A Defensive Strategy, to Protect Income.
Just as the defense in sports provides protection against the opponent scoring, education smooths the flow of income and reduces gaps in income, by:
Easing initial access to employment,
Minimizing how often one becomes unemployed,
Shortening the duration of unemployment,
Providing more financially attractive opportunities within one’s field, where retraining and adjustment costs are minimized or easier, and,
Accessing more-profitable industries that pay better.
Experience Acts Like An Offensive Strategy, to Grow Income.
Again, as in sports, (where offense provides the main chance to score), work experience produces salary growth. Experience significantly raises one’s annual income by aiding:
Earlier and more accurate comprehension of opportunities in one’s field, often accompanied by perceiving actual risk as lower or more readily avoidable than others will see it.
Deliberate upward job changes, that is, seeking upward mobility through “job-hopping” to enrich one’s experience.
Self-employment and entrepreneurship, which produce experience handling responsibility under pressure.
Part-time work, ranging from supplemental side-line work to full-time employment doing part-time jobs.
Consulting, to sell specialized expertise or problem-solving skills, for example, selling one’s expertise in the gig economy instead of long-term employment.
Married Couples Can Adopt an Offensive-Defensive Income Strategy.
In this familiar technique, one spouse takes a salary from a steady job and the other goes for the chancy big reward through self-employment, higher-risk employment, or pursuing opportunities in unusual locations or circumstances.
Work experience gets insufficient attention as a crucial source of salary compensation. Work experience can be boosted daily, it connects workers with more people and their networks, and it can be expanded in many ways. Unlike stepping away from work to advance one’s formal education, a worker gaining additional problem-solving skills and productive capabilities gets paid by an employer while gaining valuable experience.
Meanwhile, education seems over-promoted as a salary generator relative to the pay growth it supports. Education is typically obtained in large degree-sized blocks, which are expensive and require a significant time commitment. Since education declines rapidly in salary value, individuals should pay careful attention to studying subjects that have value beyond the workplace and throughout their lives.
Figure 1 details New Jobs’ eight-step estimate of the components of 2017 salary and wage income of the Massachusetts workforce of 3,657,291 individuals as of December 2017. Our sources are shown in the key at the bottom of Figure 1.
We started at Line 1 in Figure 1, reporting all the money individuals in the state earned from all income sources. Line 8 shows what the Massachusetts work force earned from its work experience.
Our first task was to calculate earnings from work alone (shown in Line 4) by removing investment and other income. Then we broke out earnings from work into three component factors.
From the total Massachusetts personal income of $464 billion (Line 1) reported by the Bureau of Economic Analysis, we subtracted income from dividends, interest and rental real estate of $93 billion (Line 2) and government transfer income of $65 billion (Line 3) from public assistance programs and Social Security.
Those subtractions estimate Massachusetts earnings from work at $306 billion, (Line 4), the amount our commonwealth’s workforce earned by working during the year ending December, 2017. Line 4 is the number we needed to break down.
We calculated entry-level pay rates by multiplying the size of the workforce by the average annual entry-level salary for all entrants into the job market in the northeastern US, getting $104 billion (Line 5) from statistics reported by ADP, the payroll processor. That $104 billion is the wage cost of what the entire Massachusetts workforce would earn if each individual were paid at ADP’s reported average northeastern U.S. entry-level wage of $14.28 per hour for last year. For those who are curious, yes, entrants earned above the state minimum for Massachusetts. And, yes, the economy would come to a halt if we were all new entrants. Please keep in mind, this is an aggregate economic calculation, not a staffing proposal.
We subtracted earnings if paid at the entry level (Line 5) from Line 4 to estimate the value of earnings above entry level (Line 6). The value of all Massachusetts salaries attributable to work experience and education combined is $202 billion (Line 6). With Line 6 in place, we could calculate the source of the special magic that Massachusetts workers bring to their workplaces every day.
The Spanish study mentioned above is one of several analyses that observe that education variables are weak determinants of salary. This imbalance is supported by a 2017 academic paper containing a detailed 1980 regression study reporting that work experience variables explain more than eight times as much variation in salary as education variables explain. Using these two studies, New Jobs broke out the proportionate salary impact of education and work experience into actual pay-level differentials among experienced individuals moving into new positions.
Using these proportions, 89 percent to 11 percent, we estimated the 2017 salary value of experienced Massachusetts workers’ education at $22 billion (Line 7).
Then we subtracted the value of education (Line 7) from Line 6 to estimate the value of work experience within Massachusetts wages and salaries in 2017 at $180 billion (Line 8).
Those calculations mean that across the educated and experienced Massachusetts workforce, the salary-generating power ratio of experience to schooling is more than eight to one (the ratio of Line 8 to Line 7).
Comment. It surprised New Jobs' research team that there were so few research studies comparing the relative salary payoff potential of education and work experience. We encourage other researchers to analyze the effects on salary of education and work experience, especially research that can be used by individuals in planning their careers.
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Sources. New Jobs drew from the following nine research sources to develop our estimate, as shown in Figure 1 (please note the links read continuously despite appearing in several lines):
— Bureau of Economic Analysis, 2018 — https://apps.bea.gov/regional/bearfacts/pdf.cfm?fips=25000&areatype=STATE&geotype=3 (pages 1, 2, 3)
— Bureau of Labor Statistics, 2018 — https://data.bls.gov/timeseries/LASST250000000000005?amp%253bdata_tool=XGtable&output_view=data&include_graphs=true
— ADP Workforce Vitality Report, Q2, 2018 — https://workforcereport.adp.com/
— International Journal of Computational Intelligence Systems, Vol. 11 (2018) 1192-1209; Salary Prediction in the IT Job Market with Few High-Dimensional Samples:
A Spanish Case Study
— Journal of Economic Literature, 2017, Blau & Kahn, https://pubs.aeaweb.org/doi/pdfplus/10.1257/jel.20160995 [possible paywall], page 799
— Georgetown University’s CEW 2015 Report, From Hard Times to Better Times
— College Board 2004, Education Pays; The Benefits of Higher Education for Individuals and Society
— Boston College Education Department, 2007 — https://www.bc.edu/content/dam/files/research_sites/agingandwork/pdf/publications/states/Massachusetts.pdf