Why finding the right career early on pays off

Most people find their first jobs to be somewhat of a mismatch. Whether you end up slinging hamburgers, crunching Excel spreadsheets late into the night, or fetching coffee and answering phones for a “The Devil Wears Prada” type executive, your first job rarely ends up being your dream job.

As their lives progress, most people go through a process of trying out different jobs and zeroing in on something better. But some people do this faster and better than others do. And new research suggests that ability can make all the difference in your lifetime earnings.

The rate at which people change jobs and careers depends on their own abilities and their level of education: In general, those with more education or training tend to settle on a career faster. And it depends on how friendly the overall economy is to making a switch. During the economic deep freeze of the Great Recession, American workers had a strong incentive to cling to their jobs, no matter how bad they were.

A new study published by the National Bureau of Economic Research suggests that making better job choices early on has big implications for people’s earnings, both in the short-run and over their lifetimes. The biggest takeaway is that there are substantial wage gains to be had from zeroing in on a job early on that fits your skills. The more time you take to find a career, the more likely you are to be leaving money on the table.

The researchers examined 33 years of job information for about 2,000 people who were between 14 and 22 years old in 1979. They found that about 16 percent of those people changed occupations in a given year. The number was higher – about 18 percent — for those with less than a high school education, and about 14 percent for those who graduated from high school.

Their research suggests that workers who don’t fit well with their jobs end up being less productive, and that lost productivity translates into lower wages. Interestingly, they found that this was true for both people who are underqualified and overqualified for their jobs — both went on to earn less at a later date. And the longer workers put off finding jobs that fit them, the worse the wage effect was over their lifetime.

“One of the things that we show is that you are your whole history of occupations,” says David Wiczer, an economist at the St. Louis Federal Reserve and one of the authors of the study.

Being badly matched in an occupation means that you have lower earnings growth in your current job, but it also means that you’ll be worse off after you switch, in your next occupation,  says Wiczer. “Because for however long you were badly matched you weren’t learning the skills to succeed in what was right for you. It’s like getting on the freeway 15 minutes later. You’re not necessarily going to close that whole gap,” he says.

The study also shows that college-educated workers tend to make better matches overall, but that bad matches lead to a much bigger wage hit for college-educated workers than the rest of the population.

Most people today assume that their first job out of school isn’t going to be the perfect match. But according to the research, there’s a strong financial reason for getting it as close to right as possible.

This theory also has long-term implications for those who are graduating into a recession, and are less able to switch into better-fitting occupations right away. “It’s got a legacy to it. It leaves a lasting impression,” says Wiczer.

The myth of American job-jumping

Past research by Wiczer and other economists shows that fewer Americans are jumping jobs and careers today than they were two decades ago.

People often assume that jobs in the U.S. are increasingly flexible and insecure, with people transitioning to new jobs and careers all the time. But while we have largely left behind the period in our history in which one job would take you from your youth to your retirement,  the idea that Americans are changing jobs and careers more than ever before is a myth.

From the end of World War II through the 1990s, the frequency with which people switched jobs and industries did rise. As the chart below, from a paper by economistsat the University of Toronto and University of Pennsylvania, shows, jobs switching did generally rise into the 1990s, especially for young people without a college education.

Gueorgui Kambourov and Iourii Manovskii, 2004

But after peaking in the mid-1990s, these figures have started to trend downward again. The percentage of people switching jobs and careers hit a bottom during the Great Recession and has risen since then, but not by much. “It’s come up since 2009, but the trend is really toward a decline,” says Wiczer.

The chart below, from a paper by Federal Reserve economists, shows the trend in people moving across state lines since the 1980s. The economists argue that these figures are highly correlated with people switching jobs and careers, since this is the reason most people move across state lines.

The chart shows that interstate migration trended upward until about 1990, at which point it starts to fall sharply. The trend is also consistent with other studies that show a downturn in hires, layoffs and people quitting their jobs, the economists say.

Raven Molloy, Christopher L. Smith, and Abigail Wozniak, 2013

Economists don’t have a precise explanation for why mobility between jobs and careers has fallen for American workers. But they have pinpointed two most likely explanations, one of which would be good news for workers, and one of which would not.

The happy scenario is that people are just doing better at finding the right job early in their careers, meaning they don’t need to switch as much later on.

This could be because more people are receiving college educations, and/or better job training and placement. Those who go to college or have job training have more time and opportunity to learn what they’re good at and what they enjoy, making them more likely to settle on the right career.

It could also be because the Internet and career networking sites like LinkedIn have made it easier than ever before for job searchers and recruiters to gather information on each other, limiting the likelihood of new employees being mismatched.

But there’s another, less rosy explanation for why fewer American workers might be switching jobs and careers. The trend could be because the economy has become generally less dynamic. With the economy so sluggish in recent years, firms might be hesitant to hire new people, and workers might be clinging to their jobs like ill-fitting life jackets.

Beyond the Great Recession, these trends could reflect a longer-run increase in the bargaining power of companies and a decrease in the bargaining power of workers, according to research published in 2013 by economists at the Fed. This could be due to the decline of unions, or the ability of companies to better monitor what competitors are paying their workers, or increased competition for workers and products due to globalization.

Another explanation is that the net benefits to workers from changing jobs might have fallen, because a lot of technology is now specific to companies, meaning new employees have to spend a lot of time being retrained.

It’s not clear which of these explanations is the correct one; perhaps they all play a role. Wiczer cautions that more research needs to be done to understand the forces behind these trends.

Shooting stars shine brighter

The research also has some important and surprising implications for inequality in America.

They may offer a partial explanation for why inequality is more extreme in the U.S. than in other countries. Wiczer cites data showing that people in the U.S. go in and out of unemployment about four times faster than people in Germany, despite the two countries having similar unemployment rates.

The U.S. makes it easier for firms to hire and fire workers than many other countries do, and the ease with which American workers can move in and out of industry is “exemplary,” says Wiczer.

The research also suggests that going to college or at least having access to job training could have a much greater effect on wages than previously thought. Going to college greatly decreases your chances of going into a job that is a poor match for your skills. So those who aren’t able to access a college education or job training could see a persistent negative effect on their wages.

In a world in which both workers and employers have a lot more information and data on each other, those who have the right qualifications can more easily rise to the top. Those without the right qualifications or education, meanwhile, have found themselves without the cushion of a reliable job.

“When you start matching people very well, now you start letting the stars shine, so to speak,” says Wiczer.

This article is published in collaboration with Wonkblog. Publication does not imply endorsement of views by the World Economic Forum.

To keep up with the Agenda subscribe to our weekly newsletter.

Author: Ana Swanson is a reporter for Wonkblog specializing in business, economics, data visualization and China. 

Image: Unemployed Belgian Mohamed Sammar (R) answers questions during a simulated job interview, which is recorded to help him get feedback afterwards in Brussels.  REUTERS/Francois Lenoir