Directed Technical Change and the Age-Earnings Profile
Workers' wages increase rapidly early in their careers and then level off and decline late in their careers. The dominant theories explain these wage "hills" by concluding that workers accumulate skills more slowly later in their careers. We propose an alternative mechanism for this effect: businesses are constantly looking for cheaper ways to produce their services. Older and younger workers perform different kinds of jobs, so some efforts to improve productivity will use younger workers more than older workers, and businesses will develop these new "technologies" to best use the workers most available to them. Because each generation tends to start out larger than the previous one, attains higher education levels than previous generations, and then shrinks as it ages and its members die, aging workers move out of the most dynamic sectors of the economy as businesses move on to figuring out how to best use the larger, better educated younger generations. We use data on 146 countries over an average of a century to show that this theory will often produce wage hills like those we see in the actual wage data.
Cragun, Randy; Tamura, Robert; and Jerzmanowski, Michael, "Directed Technical Change and the Age-Earnings Profile" (2015). Graduate Research and Discovery Symposium (GRADS). 159.
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