What Is the Value of Experience?

Companies in most developed nations are watching with uncertainty as their baby boomer employees age. Older workers have a rich vein of experience to draw upon, but they also lose some degree of cognitive ability as they age. So are older workers more productive or less so?

The answer depends on the industry they work in, say two researchers in a working paper under review at Economic Policy. In old-line industries, productivity increases slowly with age and experience. In high-tech industries, on the other hand, productivity rises rapidly with experience but peaks early and declines just as rapidly.

Francesco Daveri, professor of economics at the University of Parma, and Mika Maliranta, head of unit at the Research Institute of the Finnish Economy (ETLA), studied three industries in Finland —forestry, industrial machinery and electronics — between 1995 and 2002, sampling productivity and workforce data for 365 forestry plants, 567 industrial machinery plants and 172 electronics plants, all involved in manufacturing and assembly.

In their April 2006 paper, “Age, Technology and Labour Costs,” Daveri and Maliranta describe their findings: “In electronics, the response of productivity to age-related variables (seniority, in particular) is first positive and then becomes negative (sizably so) as one looks at plants with higher average seniority and experience.” In fact, productivity rises quickly, but seems to peak after just six years of seniority. Over the subsequent four years, productivity declines by about 68%.

The same decline in productivity at higher levels of age and seniority is not evident in the other two industries. And during this whole time, of course, wages are rising in all three industries, meaning that electronics firms pay more to, but get less from, more experienced workers.

It seems, then, that the rapid technological and managerial changes of the high-tech industry might be more suited to younger workers. Think of this as the work force equivalent to parents’ observations that their children are more facile than they are with new consumer electronics. On its surface, this suggests that a high-tech firm would do well to let its more experienced workers go and recruit the next generation.

However, there could be other explanations for the productivity decline, the authors caution, because the research covered plant-level data, not data on individual workers. “A worker in a plant might learn a lot over the first six years.