Technological Progress and the Earnings of Older Workers
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Abstract
Economists’ standard model assumes that improvements in total factor productivity (TFP) raise the marginal product of labor for all workers evenly. This paper uses an earnings dynamics regression model to study whether, in practice, older workers benefit less from TFP growth than younger workers. We utilize panel earnings data from the Social Security Administration’s Continuous Work History Sample. The data include workers of all ages, and we use annual figures for 1950-2004. Our first specification relies on BLS measurements of TFP. Our second model develops a new TFP measure using a principal components analysis. We find that although the earnings of younger workers track TFP growth 1-for-1, the earnings of older workers do not: we find, for example, that a 60-year-old male’s earnings grow only 85-90% as fast as TFP. Nevertheless, our analysis implies that in an economy with an aging labor force, gains from experience tend to outweigh older workers’ inability to benefit fully from TFP improvements.
Key Findings
- We develop an earnings dynamics model that shows how technological progress affects workers’ earnings at different ages.
- Analyzing earnings data from 1950-2004, we find that earnings of younger workers rise commensurately with increases in productivity, whereas, earnings of
- 60-year old workers grow only about 90% as fast as overall technological progress.
- However, we find that earnings growth from accumulating experience for older workers more than compensates for declines in ability to benefit from improvements in technology.
- Although increases in longevity presumably encourage workers to consider longer careers, declines in earning power likely have the opposite effect, especially during eras of rapid technological change.
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Paper ID
WP 2013-280Publication Type
Working Paper