Tuesday, August 20, 2013

Changes in Skill-Income Payoff Over 10 Years

Everybody knows that a high level of skills is associated with high earnings, but perhaps you have been wondering which skills have the highest payoff. I actually answered that question just about a year ago in a blog that I wrote called “Transferable Skills with the Biggest Payoff.”  When I did the research for that blog, I wanted to use a statistical approach to seeing which skills are linked to the highest earnings, so I computed the correlations between the skill ratings of occupations and their median income. In the blog, you can see that Judgment and Decision Making, Complex Problem Solving, and Active Learning were the transferable skills with the highest payoff.

Now, a year later, I have been thinking about career trends and decided it would be useful to see whether these correlations changed over time. So I ran correlations again, using 2002 and 2012 earnings data from the Bureau of Labor Statistics. If you want to understand how I calculated correlations, as well as the significance of correlations as a technique, I suggest you look at the earlier blog.

As you might expect, the payoff for some skills increased over that ten-year span and decreased for others. Even the largest differences were not very big: the correlation of one skill gained by .06. Keep in mind that correlations are computed on a scale in which 1.0 means total correlation. You may think of the numbers as equivalent to percentages, which means that the biggest gain in correlation was equivalent to 6 percent.

So here are the skills that gained the most from 2002 to 2012, which is to say that their connection to earnings increased the most:

2002 Correlation
2012 Correlation
Technology Design
Management of Material Resources
Management of Financial Resources
Management of Personnel Resources

I find it really interesting that three of these skills are managerial. What I take away from this is that compensation for management has probably been increasing over the last decade relative to compensation for other occupations.

I’m not surprised to see Technology Design posted the largest gains. Here’s how this skill is defined: “Generating or adapting equipment and technology to serve user needs.” It is well known that technology jobs are in high demand, but this skill is about practical uses of technology rather than scientific principles. The increasing correlation of this skill with earnings gives reinforcement to the idea that what increasingly drives the U.S. economy is innovation in applications of technology—think of the iPhone, for example.

I’m intrigued by the large gain for Installation. You’ll notice that the correlation is still in negative territory, which means that the more of this skill you use, the lower your earnings are likely to be. However, over the past decade the correlation got .04 closer to zero, which means that having this skill as an important part of your work has become less of an income liability. Perhaps the occupations with a heavy emphasis on installation are becoming better compensated as the level of technology that they use increases. In other words, as technology becomes simultaneously more complex and more important in everyone’s lives, it is becoming increasingly necessary to pay good wages to people who can install the sophisticated software and hardware that we use constantly.

Only four skills had lower correlations to earnings in 2012 than in 2002, meaning that there is less of a payoff now than there was then. These are the four:

2002 Correlation
2012 Correlation
Operation and Control
Equipment Maintenance

Note that three of the four have negative correlations, meaning that they already were associated more with low earnings than with high earnings and only got more so. These three skills—Repairing, Operation and Control, and Equipment Maintenance—are characteristic of rust-belt occupations that are being replaced by robots and foreign workers.

I was quite surprised, however, to see that Science had lost ground. The contrast with the performance of Technology Design is instructive and tells me that applied scientific knowledge has gained in earnings even while abstract scientific knowledge has lost slightly. It is consistent with the disappointing national trend toward diminished funding for basic scientific research and reminds me of how a member of my family recently quit her job in medical research and became a software developer. I looked at how the correlation for Science changed on a year-by-year basis and found that it actually climbed during the first half of the decade, peaking in 2008, and then began its downward slide. This suggests that the Great Recession brought on the comparative decrease in pay for scientific research jobs.

It’s important to understand that none of the nine skills I focus on in this blog is among those with particularly high correlations with income. The movement you see here happened in the middle and bottom of the pack. If income is very important to you, I suggest you look at the earlier blog and aim at occupations that involve Judgment and Decision Making, Complex Problem Solving, Active Learning, and other skills with the highest correlations.

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