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. Then new machines [are installed] as well as new methods of production, and he or she is unable to cope,” explains Daveri. “This could be associated with lower productivity for the individual.”

Alternatively, he explains, it’s possible that the smartest and most productive of the younger workers are more likely to quit after six years, leaving the firm with a less productive set of workers from the same cohort. That’s a very different proposition. As yet, however, the authors are unsure whether one effect dominates the other.

In the high-tech industry — in Finland, this primarily comprises Nokia Corp. and the burgeoning group of companies that support the cellular phone handset industry — the two interpretations of the data pose a dilemma. On the one hand, if a company thinks its most productive workers tend to leave the firm after a few years, it might make investments to retain them. If they do that, however, and it turns out that all workers’ productivity simply declines after a few years, then the company could be retaining too many expensive, less productive workers.

On the other hand, if a company believes that productivity declines as new equipment and processes are adopted, it might invest more in training and support to keep productivity high. Again, however, if it turns out that smarter workers are leaving the firm, then those workers would probably still seek out greener pastures and the company would be left with its less productive workers, though they would be marginally better trained. As a result, Daveri says, it will take more work to differentiate between the two effects before clear implications can be drawn for high-tech firms.

Luckily, the results are much clearer for managers outside of high tech: Their workers are likely to stay productive right up until retirement. That’s an encouraging trend.

What about the service industries? “My guess based on this research is that as long as the services use traditional technologies, there is less of a problem,” says Daveri.

The paper is currently available for download from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=895080. For more information, contact Francesco Daveri (francesco.daveri@unipr.it) or Mika Maliranta (mika.maliranta@etla.fi).