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Explaining Cross-Cohort Di fferences in Life Cycle Earnings

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  • Guillaume Vandenbroucke

    (Federal Reserve Bank of St Louis)

  • B Ravikumar

    (Federal Reserve Bank of St Louis)

  • Yu-Chien Kong

    (University of Iowa)

Abstract

Earnings growth has been systematically decreasing from one cohort to the next, starting with the cohort that was 25-year-old in 1940. This cohort's labor earnings were multiplied by a factor of 4 between the ages of 25 and 55. For the 1980 cohort the same calculation yields a factor of 2.2. Why are recent cohorts facing flatter earnings profiles? Our theory combines two elements: (1) the incentives to accumulate human capital over one's work life are decreasing in the initial stock of human capital; (2) recent cohorts are more educated and do start their work lives with more human capital. We build and calibrate a parsimonious model of schooling and human capital accumulation on the job to fit the earnings of the 1940 cohort at different ages. Our model accounts for more than 60% of the decline in the growth rate of earnings between the 1940 and the 1980 cohorts as the result of a single exogenous factor: increasing aggregate productivity.

Suggested Citation

  • Guillaume Vandenbroucke & B Ravikumar & Yu-Chien Kong, 2015. "Explaining Cross-Cohort Di fferences in Life Cycle Earnings," 2015 Meeting Papers 1409, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:1409
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    2. Keller, Elisa, 2019. "Labor supply and gender differences in occupational choice," European Economic Review, Elsevier, vol. 115(C), pages 221-241.
    3. Ahlfeldt, Gabriel M. & Maennig, Wolfgang & Mueller, Steffen Q., 2022. "The generation gap in direct democracy: Age vs. cohort effects," European Journal of Political Economy, Elsevier, vol. 72(C).
    4. Delalibera, Bruno Ricardo & Ferreira, Pedro Cavalcanti, 2019. "Early childhood education and economic growth," Journal of Economic Dynamics and Control, Elsevier, vol. 98(C), pages 82-104.
    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. Vandenbroucke, Guillaume, 2021. "The baby boomers and the productivity slowdown," European Economic Review, Elsevier, vol. 132(C).
    7. Christian Belzil & Jörgen Hansen, 2020. "The evolution of the US family income–schooling relationship and educational selectivity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(7), pages 841-859, November.
    8. William G. Gale & Hilary Gelfond & Jason J. Fichtner & Benjamin H. Harris, 2021. "The Wealth of Generations, With Special Attention to the Millennials," NBER Chapters, in: Measuring Distribution and Mobility of Income and Wealth, pages 145-174, National Bureau of Economic Research, Inc.
    9. 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.
    10. 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.
    11. Benoit Dostie & Genevieve Dufour & Raquel Fonseca & Étienne Lalé, 2020. "Évolution séculaire du profil des salaires en fonction de l’âge : Québec, Canada et États-Unis," CIRANO Project Reports 2020rp-21, CIRANO.
    12. Hendricks, Lutz, 2016. "Accounting for changing returns to experience," CFS Working Paper Series 558, Center for Financial Studies (CFS).
    13. George-Levi Gayle & Prasanthi Ramakrishnan & Mariana Odio-Zúñiga, 2021. "Work, Leisure, and Family: From the Silent Generation to Millennials," Review, Federal Reserve Bank of St. Louis, vol. 103(4), pages 385-424, October.
    14. Keller, Elisa, 2014. "The slowdown in American educational attainment," Journal of Economic Dynamics and Control, Elsevier, vol. 46(C), pages 252-270.

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    More about this item

    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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