Question

A basic finding of labor economics is that workers who have more experience in the labor force are paid more than workers who have less experience (holding constant the amount of formal education). Why might this be so? Some studies have also found that experience at the same job (called job tenure) has an extra positive influence on wages. Explain why this might occur.

Answer 1

Workers with more experience earn higher wages because they develop greater skills and productivity. Job tenure leads to even higher pay as it adds job-specific knowledge, reducing turnover costs for employers. The efficiency wage theory explains why employers pay higher wages to motivate and retain skilled workers.

Step-by-step explanation:

Workers with more experience are typically paid more due to the skill acquisition and professional development that occurs over time in the labor force. This additional experience translates into better productivity and expertise, which in turn is valued higher by employers. This concept ties in with the efficiency wage theory, which suggests that better-paid employees are more productive and motivated to remain with their current employer due to the understanding that losing their job could result in a salary decline.

Additionally, job tenure specifically boosts wages further since long-term employees also tend to accumulate job-specific skills and knowledge, which increase their productivity and reduce turnover costs for the employer. Employers are likely to pay a premium to experienced workers to avoid the costs and time involved in hiring and training new employees. As a result, employers hope to maximize their long-term operational efficiency and stability by retaining skilled, tenured workers.