The Value of Your Projected Lifetime Earnings
Earnings functions are the most used methods of assessing the economics of labour and of education.
What if they don’t work?
Jacob Mincer created the first of them in 1958. In general, it says that your career earnings depend on your years of schooling and your experience. Nothing too revolutionary there, but that was in 1958. There were amendments in 1974 that created what is known now as the “Mincer Model.”
Education is an investment. That investment is two-fold. 1) The cost of the education itself and 2) the loss of the years that could have been spent working and adding to the experience inventory.
Recent study indicates that the model still has validity in developing countries, but is misleading in the United States and possibly other developed countries.
Some of Mincer assumptions have become obsolete.
- Career durability is questionable. Fifty years ago if you started a definable career, you could count on working at it for as long as you chose. Mincer assumed near certainty of future earnings. Now computers and outsourcing are rapidly replacing many career people. Who is planning to be a draftsman, or a typesetter or an autoworker, or a record company executive? The conventional wisdom now is people will have at least three careers in their working lifetime.
- When Mincer found that years of education was correlated with higher future earnings, it was at a time when few people went on to university. In his study high school graduation was in the top third of the study. There is a big advantage to an education if you are one of only a few who has one. Today many people have degrees and diplomas that provide them with little or no advantage. Given their cost, there may well be a disadvantage. The four years of experience plus the money saved might be worth more. Anything that is huge supply is not valuable. It is called the “Alchemists Dilemma.” If anyone could create gold from a base metal, how much would it be worth?
- The Mincer model does not make qualitative decisions about years of schooling. We know that a year in a high paying specialty has more value than a year in a lower paying one. Engineers earn more than poets, not because they are necessarily more valuable, but rather because more people want to hire one.
- Some students learn more than others in a given year. Ability and effort matter. Not considered by Mincer.
- Experience is a significant factor. Mincer’s original study shows that there is a sharp increase in earnings due to experience up to about year 12. After that it goes a bit flat and after thirty years the value of experience declines. The sharp rise with experience is still there, but it may be shorter than 12 years and the decline will begin far sooner than year 30. Experience becomes obsolete much more quickly today.
What actionable information can we use to better our lives and those of our children?
- Some university courses do not materially improve your expectation of lifetime income. Nevertheless, the debt or loss of investable assets tend to persist and thus may create a negative value to that education. Be aware of qualitative issues.
- It will become necessary to change career paths in order to stay on the quick rising part of experience. Be alert for soft skills that you learn while working. Persuasion. Leadership. Problem solving. Ability to deal with ambiguity. Discipline. Research. Communication.
- Part-time work while a student is valuable experience. Anyone who thinks the customer is always right has not worked in customer service. Similarly, one can learn empathy for customers who are right.
The world has changed and will change more. Anyone who relies on obsolete generalities, like the Mincer model, is doomed.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.