Of all the astronomical numbers associated with the financial collapse–$8 trillion in lost housing equity from 2001 to 2008, and the $4.7 trillion bailout program–perhaps the largest economic cost of the long-running recession comes from the wasted talents of millions of unemployed Americans.
With the official rate of unemployment running at 9%, which translates into nearly 13 million people out of work, the nation is not only being deprived of the benefits of a larger working population, but is also suffering the accumulated costs of millions of years of wasted human experience.
This accumulation of wasted human experience diminishes the value of “knowledge capital.” While knowledge capital suffers from being an academic term, the idea is straightforward. Knowledge capital encompasses the combined experiences, formal education, insights, relationships, training, and emotional and self-developed intellect that slowly accrue over years of working with other people in both formal and informal business and social settings.
While the cost of knowledge capital is difficult to quantify, economists have developed a formula to measure work experience and insights, which it uses as part of calculating the value of intellectual property. One calculation considers knowledge capital to be the value of management-added knowledge divided by the cost of capital.
In practice, this means that the accumulated formal and informal business and social experiences of the most educated generation in human history—American Baby Boomers—is being either wasted or underutilized today due to downsizing, age discrimination, or forced retirements.
How much is knowledge capital worth? Using an example from Paul A. Strassmann’s book, “Knowledge Capital,” if a starting salary for an engineer is $40,000, and their real income grows at 4% annually, their lifetime potential earning capacity is $6 million. But without continually gaining new knowledge, their lifetime earnings would be 67% less. For a manager-level worker earning $60,000 annually, their managerial knowledge accumulated over 10-years would result in knowledge inputs costing about $150,000.
While there are a few acknowledged methods of calculating knowledge capital (mostly related to valuing intangible assets, including brand value), they are complicated and have not been done from the perspective of the accumulated loss of worker experience, especially at the national level. If these calculations were made, this number could easily amount into the trillions of dollars.
But in the current recession, knowledge capital is being destroyed at a rapid date as experienced Baby-Boomers are being pre-maturely forced out of their positions. When these same workers take lower-paying jobs, they are never compensated for their accumulated work experience. Worse, a prospective employer can use it as a means of eliminating over-skilled workers from the applicant pool.
Age Discrimination and Lower Wages
The waste of knowledge capital, aka work experience, is directly tied to age discrimination. After all, what is age discrimination all about if not for the fact that employers do not want to pay experienced workers for their accumulated knowledge, plus health and retirement benefits?
Princeton economist Henry Farber has found people who were laid off in the current recession and were re-hired suffered an 18% pay cut. Another economist, David Autor of MIT, identified a bifurcated job market with jobs at the high and low ends of the skills spectrum, but fewer jobs for middle-skill, middle wage white and blue collar employees.
CBS’ news program Sixty Minutes did a segment (“Trapped in Unemployment”) on Feb. 26, 2012 in which it interviewed older workers, many of whom were unemployed for over a year. Reporter Scott Pelley failed to identify that he was sitting face-to-face with age discrimination, a practice which is illegal, but so commonplace and difficult to prove that it is an everyday reality. The report noted that one-third of the unemployed, some four million people, have been out of work for over a year. This is the worst job recovery in over 60 years, CBS said.
It also is another indication that the entire labor and work market is being transformed. Less experienced, less sophisticated, cheaper workers are now needed since technology has been incorrectly substituted for experience. That is evident today in complaints about reduced customer service, call center workers trying to solve problems by reading scripts, and salespeople offering canned advice.
The economists say employers are emphasizing productivity (however that is measured) over quality. But whatever the reason, the workplace clearly does not want to pay for experience. In all the coverage about the recession and election, this is a subtle change that will have serious repercussions for younger and older workers. After all, if an n employer does not want to pay for experience, it diminishes any worker’s value.
Origins of Knowledge Capital
Knowledge capital has its origins in classical economic theory, specifically as it relates to the relationship between capital and labor. These discussions, dating back 100 years, state that only capital assets (such as machinery or factories) can increase labor productivity. This would mean that new steam engines or machinery would make their human operators more efficient. In turn, this would increase a factory owner’s returns on assets or returns on investments. These capital improvements alone would then drive profits.
Employers certainly valued the role of employees, but only up to a point. Within the confines of this classic theory, labor could receive higher wages if their knowledge improved the use of the capital investment (the steam engine, for example.) When this happened, workers would be entitled to a raise or bonus.
The problem with this theory is that it ignored how quickly workers learn new productivity-enhancing techniques. “The productivity of labor is not only a matter of wages. Productivity comes from knowledge capital aggregated in the employee’s head in the form of useful training and company-relevant experience,” Strassmann wrote.
This explains how entry-level workers become more valuable to a company. They receive formal on-the-job training and instruction, but they also learn from a variety of informal sources, ranging from attending meetings, reading e-mails from more knowledgeable sources, Web conferences, phone conversations, and mentoring. Even hearing company gossip adds to an employee’s overall knowledge.
This is all known as “social capital” and is defined as the know-how or more formalized knowledge that can be applied to solve a problem that is not directly part of an employee’s current job duties. Since older workers commonly develop broad social networks over the course of their careers, this social capital can come into play in work situations because they simply know the “right person” from their accumulated years at various jobs, who has the solution to a pending problem.
Over a decade of work and accumulating knowledge capital, an employee can become worth more than what they are being paid. When this happens, the company recoups their investment in accumulated knowledge capital in the form of incremental profits.
From the employee’s perspective, this gradual accumulation of industry and company-specific knowledge should become even more valuable in the marketplace. When employees learn new skills and their employer invests in continuing education, the company benefits by having skilled workers. Simultaneously, the employee increases their knowledge capital. When this scenario ideally unfolds, it provides the basis for employees to receive promotions and higher salaries.
Devaluing Experience in a Transient Workplace
While the trillions in wasted knowledge capital continue to mount, the future workplace does not look like it will begin to reward more experienced workers for their accumulated experience.
Workers today, both experienced and non-experienced, reside in a more transient work environment. Since the 1980s, and during the recessionary periods since then, employers have begun to treat workers as expenses or “interchangeable parts in the organization machine,” according to “The Boomer Retirement Time Bomb,” by Donald L. Venneberg and Barbara Welss Eversole.
When older workers are forced out of jobs, their accumulated knowledge goes with them. This is a major reason why companies lose productivity. Companies often delude themselves when they think they can hire younger workers at lower wages, without suffering a loss in future productivity. The reason is that younger workers take years to train. Given the realities of the new work environment, they may never attain the same level of social knowledge as more experienced, older workers who have decades of social networking connections.
It also is no coincidence that the current mania for social networking, via Facebook and LinkedIn, is being used as a synthetic replacement for the actual more expensive, time-consuming and powerful face-to-face connections made by older workers after years of working in old-fashioned, pre-e-mail linked offices. While it is too early to know, old-school social networking could prove to be more powerful and long-lasting than tweets and e-mails passed between younger people. A basic criticism is that electronic social networking lacks the textual capacity and body language needed to build deeper human relationships.
While there is little doubt that the current recession differs significantly from past ones, it looks like knowledge capital has lost value. How else can we explain why our most experienced employees are prevented from making their extraordinary contributions to employers?