The Bermuda Triangle: Age, Earnings and Productivity

The relationship between age, earnings and productivity is a Bermuda Triangle into which countless economists, philosophers, lawyers, HR professionals and compensation pros have been hopelessly lost.

The first part of this question was addressed in my last Cafe post. We saw from the age earnings profile that earnings increase rapidly in the earlier years, from the late teens / early 20s through the mid-40s. From the mid-40s through the mid-50s, earnings "flatten out". After the mid-50s, earnings decline.

I mentioned that different explanations had been offered, ranging from the biology of aging, labor market dynamics, human capital theory, organizational dynamics, and outright age discrimination. I also promised you that we would introduce productivity into the mix in this post.

Before I get to the age-productivity relationship, I want to mention a couple of things about the earnings-productivity relationship. How do we relate productivity to earnings? This seemingly simple question is not really that simple. Economists have been arguing about it for more than a century (I'll spare you the details of this 100-year debate!).

One popular view is human capital theory. In a nutshell, human capital theory says that an individual's earnings are determined by his relevant skills and abilities, which in turn affect production and productivity. So if an employee has more relevant skills and abilities, he will be more productive, and in turn will earn a higher wage.

Compensation pros might recognize a similarity between human capital theory and "pay for performance". Many of my Cafe teammates have written extensively on pay for performance, and can articulate this philosophy far better than I can. But as I understand it, the basic idea is that an individual's compensation is tied to his performance, and performance is a proxy measure for productivity.

Assuming that pay and productivity are positively related, what does this tell us about the relationship between productivity and age? Can we infer that the reason earnings "flatten out" in the mid-40s to mid-50s is that productivity is flattening out during this period?

This is an emotionally charged question for a lot of people. We can point to examples of why productivity might flatten as we age. But we can point to just as many examples of why productivity wouldn't flatten as we age. Some argue that younger people may be more "productive" working with technology since they have grown up with that technology. Others argue that senior level executives' productivity increases with age, since over time they become "seasoned" leaders.

In some cases, there may be physical or biological reasons why productivity would flatten with age (think about jobs that require a lot of manual dexterity and how arthritis, for example, might impact productivity).

But in other cases, our perception that productivity flattens with age becomes a self-fulfilling prophecy. If your opportunities at work for learning new things and taking on new challenges declined, how engaged would you be? If your rewards package didn't fit anymore in terms of flexibility of hours and work location, would you be as motivated as you were when it did fit? What impact would this have on your productivity?

How do you think about rewards? Do you really think about it, or are you going for the one-size-fits-all approach? One-size-fits-all is certainly a lot easier, but I think you're better than that. You're a smart, talented comp pro who can design creative - and cost effective - rewards solutions to keep your entire workforce motivated and engaged, regardless of age. And because you're so good, you'll be able to skipper your organization right through the Bermuda Triangle that swallowed lesser crews!

Stephanie R. Thomas is an economic and statistical consultant specializing in EEO issues and employment litigation risk management. For more than a decade, she's been working with businesses and government agencies providing expert EEO analysis. Stephanie has published several articles on examining compensation systems with respect to equity. She is the host of The Proactive Employer, and is the Director of the Equal Employment Advisory and Litigation Support Division of MCG.

Comments

[Laura Schroeder]

Great post, Stephanie!

I would agree with you that experienced increases productivity - you work less but get more done because you know what you're doing. Over time this can turn into inflexbility and then it may be time for a change. If no new opportunity is available, you probably get less productive for exactly the reasons you mentioned.

Continuing to give development opportunities to more experieneced workers might also help alleviate the risk that they feel 'overqualified' and leave. . . why should better opportunities only exist elsewhere?

[E. James (Jim) Brennan]

Yes. In the ancient world dominated by sweat-labor, productivity for most people would decline with advanced age due to physical limitations. In today's world of knowledge-work, the relationship is inverted and the seniors (unless ossified) are far more efficient/productive than the beginners. Youth and strength are no match for experience and treachery... or something like that.

Generalities like these are dangerous, though, because it is all job-related. Consider the Sandia Labs case where they cut wages for older engineers simply because the maturity curve data published by the Joint Council showed that olders earned less, implying they were worth less due to productivity limitations. (That employer was sued so often for age discrimination that I couldn't find the precise citation of that ~1972? case but did find an old article I wrote on this subject at http://www.salaryexpert.com/index.cfm?fuseaction=blogs.main&ID=5468d0be-1855-475c-9e11-834f3322e047).

Today, after dealing with all the responses to my post of Monday, I don't want to hear the word, "overqualified."