The Effect of Demographic Factors on Age-Earnings Profiles

Abstract

This paper examines the effect of the increased number of young persons on the job market on their earnings relative to the earnings of older workers.The principal finding is that the age-earnings profile of male workers appears to be significantly influenced by the age composition o~the work force.When the number of young workers increased sharply in the 1970s, the profile lItwisted ll against them, apparently because younger and older male workers are imperfect substitutes in production.The effect of changes in the relative numbers of workers of different ages on age-earnings profiles is especially marked among college graduates.By contrast, the age-earnings profile of female workers, which tends to be quite flat, appears to be little influenced by the age composition of the female work force, possibly because the intermittent work experience of women makes younger women and older women closer substitutes in production.Whether the sizeable decline in the earnings of the large cohort of young workers entering the market in the 1970s relative to the earnings of older cohorts will persist, creating a lifetime lI s ize of cohort" earnings effect, or whether the new entrants of the 1970s will significantly catch up in earnings in future years remains to be seen.The dependence of the ageearnings profile on demographically-induced movements along a relative demand schedule suggests that standard human capital models of the profile, which posit that earnings rise with age or experience solely as a result of individual investment behavior are incomplete.

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