Are Earnings Profiles Steeper Than Productivity Profiles? Evidence from Israeli Firm-Level Data
We test competing explanations of rising age-earnings profiles by obtaining direct estimates of marginal productivity differentials between workers in different age groups and comparing these to associated earnings differentials, using contemporary data from Israeli manufacturing firms. The results indicate that, controlling for other productive inputs and firm characteristics, for the unskilled or less-skilled workers who represent most of the workers in our sample, both earnings and productivity profiles are upward sloping. Moreover, these profiles mirror each other closely, and are statistically indistinguishable. However, the estimates of the profiles are sufficiently imprecise that even sizable deviations between point estimates of earnings growth and productivity growth would not be statistically significant. While we view the results as most consistent with a general human capital model of rising earnings profiles over the life cycle, there is not strong evidence with which to reject alternative models.
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