Actual vs. Potential Experience Bias
Observational StudyReview
Standard labor market evaluations rely on potential experience proxies calculated as age minus years of schooling minus six. In developing economies characterized by interrupted schooling and frequent unemployment, potential experience severely overstates accumulated work history and understates the causal wage returns of actual employment.
Picture this
Calculating how many years someone has been a driver by subtracting their high school graduation year from their current age creates significant error if they spent five years without a car. Taking a simple formula creates a false picture of driving practice. Measuring the actual days spent driving reveals the true rate at which time behind the wheel translates into skill and higher pay.
What the evidence says
Traditional potential experience formulas understate experience payoffs, whereas tracking actual 5-day work experience demonstrates an average daily wage increase of $3.83 to $4.19 (an approximate 80% daily wage increase, p < 0.05), which equals nearly 10 years of potential experience in non-experimental Malawian estimates.
- Who was studied
- N = 227 urban male youth job seekers in Lilongwe, Malawi.
- How
- Methodological comparison of non-experimental Mincerian returns using potential experience against experimental Local Average Treatment Effects (LATE) using 8 months of actual daily employment tracking data.
What to do
Collect granular panel or calendar history data on actual days worked rather than using age-schooling formulas when evaluating returns to labor in developing countries.
From the source
"Potential experience is considered a poor proxy in general, and the prevalence of interrupted or delayed schooling and periods of unemployment in the developing-country context renders this an even poorer proxy for actual experience in these areas."
b23e842f-67cd-47d7-9b15-b6b6c8e557a2-Employment Exposure- Employment and Wage Effects in Urban Malawi.pdf