Directed technical change: A macro perspective on life cycle earnings profiles

We propose a new macroeconomic mechanism for generating patterns in age-earnings profiles based on directed technical change. The mechanism does not depend on changes in the human capital of the individual; rather differences in the human capital shares of age groups affect the profitability of developing age-specific technologies, biasing innovation toward improving the productivity of workers whose cohorts provide large shares of the labor force's human capital. The theory should be taken as supplemental to (rather than replacing) human-capital-based theories of age-earnings profiles. Using recently developed data and human capital estimates, we simulate reductions in wages due to age-biased directed technical change over workers' lives for most of the world's nations over two centuries. Our simulations indicate that age-specific directed technical change contributes to wage concavity for the average country by cohort group. Because younger workers make up a larger share of human capital in most years and countries, most cohorts in most countries experienced wage gains early in life and losses later in life from age-specific directed technology, making life-cycle earnings profiles flatter. The late-life losses are larger than the early-life gains, increasing concavity in life-cycle earnings profiles. We also calculate the present value of lifetime wage gains from age-specific endogenous technology, and find particularly large and economically-significant gains for baby boomers and losses for cohorts born during low population growth periods.