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Applying a CRESH aggregate labour index to generate age-wage profiles

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  • Ross Guest
  • Jensen

Abstract

This article shows how a CRESH (Constant Ratios of Elasticity of Substitution, Homothetic) labour index can generate more realistic optimal wage profiles than traditional (restrictive) functional forms. The CRESH index function allows for age-specific elasticities of substitution that are implied by a proper choice of CRESH parameters. The ability to generate plausible optimal age-wage profiles can be useful in, for example, calibrating demographic macroeconomic models. The CRESH analysis also provides one explanation for the well-established divergence of actual relative wages by age from the relative age-specific intensity parameters of a simple additive labour index. Moreover, CRESH labour index may explain the increasing relative wages for middle-aged workers as a result of employing larger numbers of older workers (population aging).

Suggested Citation

  • Ross Guest & Jensen, 2016. "Applying a CRESH aggregate labour index to generate age-wage profiles," Applied Economics Letters, Taylor & Francis Journals, vol. 23(1), pages 27-33, January.
    • Handle: RePEc:taf:apeclt:v:23:y:2016:i:1:p:27-33
    DOI: 10.1080/13504851.2015.1047083
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