Human capital explained: How experience changes careers

In this episode of the new Future of Asia Explains Podcast series, Kanmani Chockalingam, co-author of the recent McKinsey report on human capital, clarifies how work experience is the differentiator that shapes careers.

Gautam Kumra: I am Gautam Kumra, Chairman of McKinsey Asia, and you’re listening to the Future of Asia Podcast series. The Asian century has begun; the region is now the world’s largest economy. As Asia’s economies evolve further, the region has the potential to fuel and shape the next normal. In each episode, we are going to feature conversations with leaders from across the region to discuss what Asia’s rise means for businesses across the globe. Join us.

Debbi Cheong: Hi everyone, and welcome to our very first episode of Future of Asia Explains, where we take big concepts and boil them down to the most important nuggets you need to know. Today, we’ll be talking about human capital and how work experiences can shape our careers in more ways than one. I am joined by Kanmani Chockalingam (KC), co-author of McKinsey’s recently published report, Human capital at work: The value of experience. It’s great to have you with us, KC.

Kanmani Chockalingam: Good morning; I’m happy to be here.

Debbi Cheong: In the simplest terms, KC, what is human capital?

Kanmani Chockalingam: Human capital is essentially the knowledge, attributes, skills, experience, and health of people. Individuals accumulate human capital throughout their lives, evolving from their childhood, through to education, and then to work. It is the potential that resides within each person. It exists, even if it is not utilized. However, labor markets set a price on human capital through compensation. So, when an individual earns wages, their human capital goes from being a potential to a realized economic value. We approximate this realized economic value of human capital as the earnings from work over an individual’s lifetime. It represents roughly two-thirds of an individual’s total wealth. Therefore, we attribute a proportion of this value to work experience based on the additional skills that a person learns through the course of their working life.

Debbi Cheong: A term that has been used frequently in the new McKinsey report is the “experience effect.” How does the experience effect influence human capital?

Kanmani Chockalingam: An analogy might be the best descriptor here. Let’s say two equally talented architects with the same backgrounds earned the same degrees from the same prestigious university and passed the same professional certification examinations. Upon graduation, one of them—let’s call her Jean—got a job at a boutique firm, while the other—let’s say Jane—worked at a commercial firm. Jane went through a solid mentorship program, learned how to use cutting-edge tools, and how to develop project proposals during her tenure at the firm. On the other hand, Jean did only low-level tasks, did not receive constructive feedback on her work, and had to use outdated IT systems.

Even with the same educational backgrounds, when both of them were ready to move to different roles five years later, Jane, who had learned new skills during her tenure, had more options available and secured a position with a substantially higher salary. In this case, you can see that work experience was the differentiator that allowed Jane to learn new skills and equip her with a track record that she could continue to leverage for her next few roles. This is what we mean by the experience effect. McKinsey research shows that the experience effect, in fact, contributes 40 to 43 percent of an average worker’s lifetime earnings in developed economies like Germany, the United Kingdom, and the United States. It adds almost 60 percent in emerging economies like India, where fewer people have a higher education. In general, people without college degrees, who start in low-wage jobs, are more reliant on work experience. For example, work experience contributes 65 to 75 percent of lifetime earnings for people who begin their careers as tile setters or counter workers, whereas it contributes only 35 percent for physicians or lawyers.

Debbi Cheong: How should companies think about the causal link between experience and human capital? Could this affect the way they attract and retain their best talent?

Kanmani Chockalingam: Companies need to think about how they can help develop their employees, because they are the ones who shape most of the variation in the experience effect. We find that 50 percent of the variation in the experience effect is shaped by early tenure experiences in effective companies. The Gallup survey that was conducted in 2021, reflected that more than 60 percent of US workers said that learning new skills was important for them in deciding whether they take up a new job or stay in their current one. Therefore, developing people and assisting them to learn new skills, will help companies attract and retain the best talent. To do this, companies can focus on three priorities: first, they should evaluate candidates for a role, both internal and external candidates, not only for the current knowledge and skills that they display, but also for their potential and capacity to learn.

Second, companies need to embrace mobility, and provide internal career paths, both upward and lateral (with an emphasis on lateral) within the organization. When talented people leave, companies should celebrate their successes and stay open to welcoming them back. And third, companies need to prioritize in-role coaching and career mentoring, especially early in an employee’s tenure, or when someone joins a new job. Companies that establish themselves as great learning organizations can become magnets for talent.

Debbi Cheong: One last question before we end this episode: What is the one piece of advice you would give to someone starting out their career?

Kanmani Chockalingam: I have three pieces of advice, if I may. One, choose early career experiences in companies that offer effective coaching, growth options, and good management practices. Two, be proactive in shaping your career trajectories, making moves that offer opportunities to learn new skills. And three, identify and work with employers who are willing to take a chance on you.

Debbi Cheong: Thank you so much, KC. That’s all for today’s episode of Future of Asia Explains. If you enjoyed it, keep a lookout for more to come. And if this topic interested you and you would like to read the full report we referred to, visit of Asia.

Gautam Kumra: You have been listening to The Future of Asia Podcast by McKinsey & Company. To learn more about McKinsey, our people, and our latest thinking, visit us at of Asia, or find us on LinkedIn, Twitter, and Facebook.

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