Most people are used to thinking about their wealth in purely financial terms. But consider the situation of someone who has just graduated from law school or medical school and is about to head into a high-paying job. Financial wealth for this person may be low–or even negative if there are student loans to be paid. But they do have an enormous non-financial asset, namely the skills and credential that will allow them to earn a high salary in the future.

Or compare two 21 year-olds, one with only a high school degree and one who has completed a college degree. Their financial wealth may be similar: again, if the college student has loans outstanding, the financial wealth of the college student may be lower. But on average, a college graduate has a nonfinancial asset that will allow them to earn a higher future salary.

Economists refer to this kind of nonfinancial personal asset as “human capital.” The idea behind the terminology is to he idea was to draw a parallel with physical capital. In each case, an economic actor incurs costs in the present that over time have a long-run payoff. With human capital, the costs can involve both money (say, college tuition) and also time (when you go beyond what’s strictly needed to do today’s job and acquire skills that will be applicable in the future). A broad view of human capital can include not just education and job experience, but also physical and mental health.

A team of researchers at McKinsey Global Institute have written a report focusing on one aspect of the topic: “Human capital at work: The value of experience (June 2, 2022). The McKinsey team looked at “a data set of de-identified job histories for approximately four million workers across the United States, Germany, the United Kingdom, and India.”

They find that for those early in a career, entry-level skills from the education system are a main determinant of wages. But over time, job experience is a bigger and bigger part of your human capital.

Here’s an illustration for the US workers in their data, over a 30-year working life. Salary rises over the lifetime. After 10 years, 61% of pay can be attributed to entry-level skills (from formal education), but after 30 years, 60% of pay can be attributed to work experience. Notice also that the pay raises over time are because of the rising role of work experience.

Of course, these results are an overall average. The report gives example of how the pay premium for higher experience (in a US context) is very large for some jobs like airline pilots and physicians, but not so large for jobs like maintenance and repair workers.

Not all job experience is created equal. People who switch to a different job with a different employer, in a way that stretches and expands their skills, will expand their experience-related human capital. This insight has implications both for workers and employers. For workers, the report offers these categories:

From our data set, we looked at a smaller universe of people with more than ten years of work history. Within it, four distinct archetypes emerge. They are not meant to convey individuals’ circumstances or motivation; they describe movement patterns and outcomes, with illustrative examples.
— Experience seekers start with lower-than-average wages but propel themselves upward by moving roles more frequently than their peers and stretching their capabilities substantially each time. The cumulative effect gives them stronger wage growth than any other archetype. Consider someone who starts as an administrative assistant at one nonprofit before landing a job cultivating donors in the development department of
another. From there, she joins a research hospital as a grant writer before stepping into
a broader communications role. Eventually she becomes head of media relations for a
major university. Our experience seeker has managed to cross over into new industries
and functions.
— Early movers make bigger leaps in the first part of their career. Someone may start in one field, quickly realize that their passion lies elsewhere, and then get a break that enables them to follow it. A graphic designer who makes print ads, for example, might become a user-experience designer early in her career.
— Late movers stay put or make more incremental moves in the early stage of their career but eventually take a bolder step. Think of a seasoned journalist who goes into corporate communications, or a real estate agent who becomes a mortgage loan officer in a bank. This is by far the largest group in the sample.
— Lock-ins change jobs less frequently, and when they do move, they do not make dramatic changes. This is not necessarily because someone is timid or stuck; they could also follow this strategy because they pursued what suited them from the start. Teachers,
for example, have invested in specialized education and may have found their calling.
However, lock-ins have the slowest wage growth, whether they start near the bottom or
near the top. Doctors start at a very high salary but do not tend to make many role moves.
While work experience accounts for 60 to 70 percent of lifetime earnings for experience
seekers and early movers, that share is only about 30 percent for lock-ins.

There are implications for employers looking for talent, as well.

Most employers can benefit from challenging the status quo of how they select people for open roles. Instead of searching for “holy grail” external candidates whose prior experience precisely matches the responsibilities in an open role, leading organizations create systems for evaluating candidates based on their capacity to learn, their intrinsic capabilities, and their transferable skills. This requires designing assessments that are fit for purpose, focusing on the few core skills that matter for success in the role. It also involves removing biases that pigeonhole people into the roles they are already performing; this point is particularly important when it comes to existing employees. In our sample, more than half of all role moves undertaken by individuals involved a skill distance of more than 25 percent—and this implies that people often have latent capabilities that are not recognized by their current employers. If someone’s track record shows the acquisition of new skills over time, it probably means that person is capable of learning more. Employers should be less constrained about recruiting candidates from traditional sources and backgrounds, and more open to people who have taken unconventional career paths.

I write as someone who has had the same job title, with the same employer, for 36 years. In the categories given above, I’m a lock-in. I’ve been very happy with my job and what I do. But especially for those early in their careers, thinking in a serious way about whether your current employer is helping to develop the breadth and depth of your work experience human capital–or whether a job with an alternative employer might help you to do so–is likely to be at least as important to your lifetime financial well-being as the decisions you make about financial savings and investment.