Experience, Performance, and Earnings

Abstract

This study provides direct evidence concerning the relationship between experience and performance among managerial and professional employees doing similar work in two major U. S. corporations. The facts presented indicate that while, within grade levels, there is a strong positive association between experience and relative earnings, there is either no association or a negative association between experience and relative rated performance. If we are correct that the performance ratings given to managerial and professional employees in any grade level adequately reflect those employees' relative productivity in the year of assessment, the results imply that the human capital on-the-job training model cannot explain a substantial part of the observed return to labor market experience.There is abundant evidence that earnings grow with labor market experience over most of a normal worklife. Since the advent of human capital theory,1 the vast majority of labor economists have accepted, or at least not openly challenged, this theory's contention that the upward sloping segment of the experience-earnings profile reflects on-the-job training, which causes the relevant underlying experience-productivity profile to slope upwards However, there are other potential explanations of the relationship between experience and earnings in which productivity growth plays a very minor role. For instance, Mincer [1974, p. 80] recognizes the possibility that the positive association between experience and earnings might only "reflect the prevalence of institutional arrangements such as seniority provisions in employment practices." He then makes the observation that sets the stage for this study: "Such practices, however, do not contradict the productivity-augmenting hypothesis, unless it can be shown that growth of earnings under seniority provisions is largely independent of productivity growth." 2 Thus, the human capital interpretation of the experience-earnings profile is distinguished from other interpretations by the pre-* We are most grateful to C. Brown, G. Chamberlain, J. Dunlop, R. Freeman, Z. Griliches, H. Leonard, H. G. Lewis, J. Mincer, A. Rees, S. Rosen, M. Wagner, and participants in seminars at Berkeley, the University of Chicago, Columbia, Harvard, the National Bureau of Economic Research, the University of Pennsylvania, and Princeton for their helpful criticisms and suggestions. We are also indebted to J. Fay and M. Van Denburgh for their invaluable assistance in carrying out the research to be discussed. The study was supported by the National Bureau's program for research on labor economics. Any opinions expressed are not necessarily shared by the individuals who have aided us or by the National Bureau.1. This event can be marked by the publication of Becker 119641. 2. Mincer has seniority provisions under collective bargaining agreements in mind when he makes this statement, but his logic applies equally well to other institutional settings.

Measuring the impact of human resource management practices on hospitality firms’ performances

“…The study showed incentive plans resulted in increased revenue and profit and in decreased cost. According to Medoff and Abraham (1980), however, two large manufacturing firms showed that monetary incentive was not closely related to employee performance, despite the firms' merit pay reward systems. The finding of this study is consistent with the study by Banker et al (2001).…”

Wages, Productivity and Aging

“…In one of the first detailed empirical studies on this topic (Medoff and Abraham 1980), use data from two major US corporations and find evidence that the wages of older workers might be higher than their productivity. Corroborating evidence has been found by Kotlikoff and Gokhale (1992) for workers in US manufacturing industries, Crépon et al (2003) for France, 2 and Haegeland and Klette (1999) for Norway.…”

Evaluation of Subjectivity in Incentive Pay

“…Evaluators face their own costs of evaluation, including working with disgruntled employees who have received not-so-favorable evaluations, the low opportunity costs of the appraisal work etc. These problems will translate into a tendency of evaluators to assign uniform ratings to employees regardless of performance (Zenger 1992;Medoff and Abraham 1980;Murphy and Cleveland 1995). The resultant rating compression is likely to reduce the effectiveness of subjectivity in providing fair bonus rewards.…”

“…A typical problem encountered in performance measurement is the tendency of evaluators to assign uniform ratings to employees regardless of performance (Zenger 1992;Medoff and Abraham 1980). Because careful appraisals take time away from betterrewarded activities, and because evaluators face large nonpecuniary costs from disgruntled employees receiving unfavorable appraisals, evaluators have the incentive to shirk their responsibilities (Murphy and Cleveland 1995).…”