Labour economics was one of my areas at Rochester, but I have not studied it since I left. As such, to say I have not kept up with the literature would be to put it mildly. What follows is an experiment in using "the economic way of thinking" and not based on any research.
Has the labour market increased the premium on past experience? Without putting my nose into the current research, I do not know, but for the sake of argument let's suppose it's true. Why could this occur?
- Changes in the types of jobs being performed. Consider a position involving a greal deal of physical labour. While the more experienced employee knows a number of short-cuts and methods to make the work easier, the less experienced employee is likely younger and physically fit, which levels the playing field. As the amount of physical labour in North America has decreased, there is less advantage to being young and physically fit.
- Jobs are more complicated now and require more on-the-job training. If training a new employee is a long and expensive process, then employers will pay a premium for employees who have already completed this training. Thus, ceteris paribus, the wages for trained employees should rise and untrained employees should fall.
- Decreased job switching costs for employees. If it is difficult for employees to switch firms, then employers will look to hire people who are not currently employed, which will include a lot of new graduates. This is not a free lunch for employees, however, as it means that employers can keep the salaries of experienced people low knowing that they would not leave.
There is a good life example of this: Baseball bonus babies of the 1950s. In the 1950s there was no baseball draft, so high school graduates could sign with any team they wanted. However, baseball had a reserve clause, meaning that a player was bound to a team for life. In the 1950s this mixture caused very high signing bonuses to young players but very low salaries after signing. If it is hard to switch employers, this should cause a low premium on experience. Removing that cost would increase that premium. But has this happened outside of baseball?
- The quality of employees has declined. It could have nothing to do with experience at all. Maybe people born in 1968 are just more productive than those born in 1988, even controlling for experience. But what would cause such a decline? Culture? A decline in the quality of higher education (meaning a degree from 1990 is more valuable than one from 2010)? I don't see it.
- Increasing number of women in the workforce / Discrimination against women under 35. Unfortunately, I know a number of small and medium sized business people who actively discriminate against hiring women in their early-to-mid 20s. Why? Because of the perceived costs on training those women, having them go on maternity leave, finding a replacement for them, and wondering if they will come back at all.
I have not seen any hard data on this, but personally I believe this discrimination exists and it has driven down the wages for women in this age category. I am in charge of hiring at our company, and I am continually amazed at how much higher quality the female applicants are for our jobs than the male applicants; I suspect the high quality male applicants are driven away by our low starting salary. If I were to rank the 100 best applications we have received at our company in the last 2 years, I suspect at least 85 of them were from females. Our company only has one male employee.
When we get new applications that look good, I give them to all the employees to assign a grade between 1 and 10 to the employee. At first I thought maybe our female employees were, for whatever reason, assigning higher grades to female applicants. For one round of hiring I removed names and any indication of gender from applications before giving them to my staff. It made no difference - the top 20 was dominated by females.
But what does this have to do with experience? Suppose you are a medium sized firm that is hesitant to hire women in their 20s. What do you do? You could hire mostly men in their 20s, but after awhile that is going to get noticed and you will be sued. Plus there is the occasional fellow who wants to go on extended paternity leave. So instead what do you is avoid hiring anyone under the age of 35 or 40 at all, as this will all but eliminate the maternity leave problem.
Does this happen? I know it does. Does it happen enough to have a noticable effect on the wages of people under 35? I'm not sure, but it's at least possible.
Those are my potential reasons. What are yours?