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Explaining cross-cohort differences in life-cycle earnings

Author

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  • Kong, Y.-C.
  • Ravikumar, B.
  • Vandenbroucke, G.

Abstract

College-educated workers entering the labor market in 1940 experienced a 4-fold increase in their labor earnings between the ages of 25 and 55; in contrast, the increase was 2.6-fold for those entering the market in 1980. For workers without a college education these figures are 3.6-fold and 1.5-fold, respectively. Why are earnings profiles flatter for recent cohorts? We build a parsimonious model of schooling and human capital accumulation on the job, and calibrate it to earnings statistics of workers from the 1940 cohort. The model accounts for 99% of the flattening of earnings profiles for workers with a college education between the 1940 and the 1980 cohorts (52% for workers without a college education). The flattening in our model results from a single exogenous factor: the increasing price of skills. The higher skill price induces (i) higher college enrollment for recent cohorts and thus a change in the educational composition of workers and (ii) higher human capital at the start of work life for college-educated workers in the recent cohorts, which implies lower earnings growth over the life cycle.

Suggested Citation

  • Kong, Y.-C. & Ravikumar, B. & Vandenbroucke, G., 2018. "Explaining cross-cohort differences in life-cycle earnings," European Economic Review, Elsevier, vol. 107(C), pages 157-184.
    • Handle: RePEc:eee:eecrev:v:107:y:2018:i:c:p:157-184
    DOI: 10.1016/j.euroecorev.2018.06.005
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    5. Christian Belzil & Jörgen Hansen, 2020. "Reconciling Changes in Wage Inequality With Changes in College Selectivity Using a Behavioral Model," CIRANO Working Papers 2020s-36, CIRANO.
    6. Daniil Kashkarov, 2022. "RBTC and Human Capital: Accounting for Individual-Level Responses," CERGE-EI Working Papers wp721, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    7. B. Ravikumar & Guillaume Vandenbroucke, 2017. "Why Are Life-Cycle Earnings Profiles Getting Flatter?," Review, Federal Reserve Bank of St. Louis, vol. 99(3), pages 245-257.
    8. Hendricks, Lutz, 2016. "Accounting for changing returns to experience," CFS Working Paper Series 558, Center for Financial Studies (CFS).
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    More about this item

    Keywords

    Life-cycle earnings; Flattening; Skill price; Education composition;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • I26 - Health, Education, and Welfare - - Education - - - Returns to Education
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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