The Experience-earnings Profile: Productivity-augmenting or Purely Contractual? Evidence from the Uk

This study provides a test of the human capital interpretation of the experience-earnings profile. Does the upward sloping portion of the experience-earnings profile reflect on-the-job training which in turn causes the experienceproductivity profile to slope upwards, or do purely contractual factors determine the nature of life-cycle earnings? Devising tests that would distinguish between the human capital model and the class of alternative theoretical models has been problematic primarily because it is difficult to obtain data measuring individual worker productivity. In the present study, we provide additional evidence on the relationship between productivity and earnings by examining earnings differentials in the UK academic labor market for economists, where constructing direct measures of productivity is less problematic. Using a test first suggested by Mincer, we find that the empirical results are consistent with human capital theory. We find that, while the positive relationship between earnings and experience persists when individual productivity measures are included in the salary equations for lecturers and senior lecturers, the positive relationship becomes statistically insignificant when the same productivity measures are included in the salary equations for professors. For lecturers and senior lecturers, the experience-salary profile properly reflects the structure of the national pay scale rather than variations in individual research productivity. At the professor level, where individual salaries are not determined by a pay scale, the data support the human capital explanation of the positive experience-earnings profile. Interest in the academic labour market for economists has generated a substantial literature in the US, dating back to the 1960s. While interest among UK economists in their own academic labour market must have been equally keen, systematic empirical analyses of academic economics in the UK has only recently appeared in print. For example, the Economic Journal recently published three papers from a symposium on the state of the British academic labour market. Blackaby and Frank (2000) examine the representation of ethnic and other minority groups among UK academic economists. Booth, Burton and Mumford (2000) focus on the representation of women within the profession. Machin and Oswald (2000) provide some preliminary explanations for the decline in the numbers of UK-born economists who elect to pursue academic employment. Blank (2000) and Freeman (2000) compare the US and UK academic labour markets for economists. In the present study, we use data culled from vitae of individual faculty members in the UK to examine several additional issues. These issues relate in one way or another to the nature of the incentive structure faced by academic economists in the UK system. Many of the issues have been previously addressed in the literature relating to US markets are considered here. In addition, though, we are able to exploit some of the institutional differences between the US and the UK academic labour markets to provide new insights into the nature of the relationship between individual pay and productivity. How does the market value research productivity and what is the relationship between the quantity and quality of research output and pay? In particular, can observed earnings differentials among academic economists in the UK system be 1 One of the first empirical studies conducted in the UK examined earnings differentials among university faculty members in three subject areas—Arts, Science and Technology. The study did not, however, provide an analysis of earnings differentials within particular disciplines. See Bowen (1963). Bowen’s study was updated by Metcalf (1970).