Wages and Ageing: Is There Evidence for the ‘Inverse‐U’ Profile?*
| Published date | 01 June 2010 |
| Date | 01 June 2010 |
| Author | Michał Myck |
| DOI | http://doi.org/10.1111/j.1468-0084.2009.00582.x |
282
©Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2010. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 72, 3 (2010) 0305-9049
doi: 10.1111/j.1468-0084.2009.00582.x
Wages and Ageing: Is There Evidence for the
‘Inverse-U’ Profile?Å
Michał Myck
Public Economics Department, German Institute for Economic Research (DIW-Berlin),
Mohren Str. 58, 10117 Berlin, Germany, and Centre for Economic Analysis (CenEA), ul.
Królowej Korony Polskiej 25, 70-486 Szczecin, Poland (mmyck@cenea.org.pl), and Institute
for Fiscal Studies (IFS), 7 Ridgmount Street, London WCIE 7AE, UK
Abstract
How individual wages change with time is one of the crucial determinants of labour
market decisions including the timing of retirement. The focus of this paper is the
relationship between age and wages with special attention given to individuals
nearing retirement. The analysis is presented in a comparative context for Britain
and Germany looking at two longitudinal data sets (BHPS and SOEP, respectively)
for the years 1995–2004. We show the importance of cohort effects and selection
out of employment which determine the downward-sloping part of the ‘inverse-U’
profile observed in cross-sections. There is little evidence that wages fall with age.
I. Introduction
The paper examines the dynamics of wages of British and German men with special
attention given to individuals approaching retirement age. This group of individuals
is important for several reasons, notwithstanding the policy focus in the light of
demographic changes in both countries. The sustainability of public pension systems
and adequacy of private savings for retirement have become important concerns,
ÅFinancial support through the REVISER project, an RTN project financed by the European Commission
(contract no. HPRN-CT-2002-00330) is gratefully acknowledged. Data from the British Household Panel
Survey used in this paper were supplied by the UK Data Archive, who bear no responsibility for its analysis
and interpretation. The German Socio-Economic Panel data are provided by the DIW’s SOEP Department.
I am grateful to ViktorSteiner and to two anonymous referees for very helpful comments and to Ian Crawford
for his introduction to non-parametric analysis. I also thank Dominik H¨ubler for his assistance, and partici-
pants of the Geary Institute Behavioural Seminar and of the XIIth Spring Meeting of YoungEconomists for
suggestions on an earlier version of the paper. The usual disclaimer applies.
JEL Classification numbers: J14, J21, J31, C14.
Wages and ageing 283
and in the context of these the question of extending working lives and encouraging
employment among the elderly has become a central policy issue. Understanding the
dynamics of wages at this stage of life is extremely important from the point of view
of economic policy, and yet so far there has been relatively little research focusing on
the development of wages among older workers.1The aim of this paper was to bring
the ‘age factor’ more to the centre of attention in the context of wage dynamics.
In the original form of the Mincer (1974) wage equation (log) earnings are a func-
tion of education and experience, where the latter in most empirical applications
is included as potential experience, taken as the number of years since leaving
full-time education. This specification, which derives from a model of human capital
investment, provided the foundation for the extensive literature on returns to educa-
tion, returns to experience and tenure as well as analysis of pay discrimination.2In the
Mincer specification age per se does not contribute to the level of the wage. It is ex-
perience embedded in age which does. As such, although the model (with a quadratic
in potential experience) seems to fit a large number of data sets remarkably well, it may
seem at odds with the theory it derives from. Although falling returns to experience
seem plausible, negative returns, which are often found in empirical studies, are
difficult to justify, unless one refers to explanations which are related to ageing.
These may include obsolescence of skills with changes in technology, age-related
lower ability to learn new skills, as well as deteriorating physical and mental abilities
and faster human capital depreciation. Ageing effects are certainly related to the
number of years of accumulated experience, but conceptually they are very different.
Since the early work of Mincer, the specification of the wage equation has been
extended to account for the separate effects of experience and tenure. With detailed
information on experience alone or on both experience and tenure one could also
examine the effect of age coming into the relationship as an additional covariate,
although identifying the ‘pure’ age effect cannot be done without restrictive assump-
tions. These relate to the problem of separate identification of effects of age, cohort
and time which cannot be solved even with panel data without strong assumptions.
As we shall see below, parameterization of age effects is also somewhat problematic.
The third problem which makes identification of age effects difficult is employment
selection, which may be especially important in the case of older workers.
In what follows we use the comparison between Britain and Germany and focus on
the relationship between age and wages among men. In some sense this represents a
departure from the Mincer-type analysis and its foundations in terms of human capital
theory as we focus on age per se and not on ‘potential experience’. The questions we
pose concern the form of the relationship between age and wages, especially among
1Johnson and Neumark (1996) analyse age–wage profiles of older men in the USA using the National
Longitudinal Survey of Older Men. Their conclusions are very close to those we draw in this paper.
2The original specification presented by Mincer (1974) was log y=logy0+S+1X+2X2, where log y0
is the log of earnings of an individual with no education and no experience, Sis years of schooling and Xis
years of potential experience. For an interesting discussion of the Mincer wage equation see, e.g. Lemieux
(2006).
©Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2010
To continue reading
Request your trial