Aging Workforce, Stagnant Youth: The Consequences of the Growing Age Pay Gap
Aging Workforce, Stagnant Youth: The Consequences of the Growing Age Pay Gap
A new NBER Working Paper, Countries For Old Men: An Analysis Of The Age Pay Gap by Nicola Bianchi and Matteo Paradisi, reveals, reveals that the pay gap between older and younger workers has been widening for decades across high-income countries, with wages of older workers growing much faster than those of their younger counterparts. The paper uses administrative and survey data to investigate this growing wage disparity.
Why it matters
This trend has significant implications for younger workers, who are facing increasing difficulties in reaching higher-paying positions and experiencing slower career progression. The study suggests that this could have long-term consequences, such as deterring younger workers from making important life decisions like purchasing homes or starting families. As older workers enjoy more successful careers, it explains why younger workers are falling toward the bottom of the wage distribution and becoming less likely to hold better-paying jobs.
By the numbers
In the United States, the same pay gap grew by 61% between 1979 and 2018.
Similar trends were observed in 14 other high-income countries, including the United Kingdom (41% increase from 1979-2018), Canada (46% increase from 1973-2018), and Germany (36% increase from 1996-2017).
In Italy, the pay gap between workers over 55 and under 35 increased by 96% from 1985 to 2019.
The likelihood of Italian workers under 35 belonging to the top quartile of weekly wages declined by 34% from 1985 to 2019, while the probability for those over 55 increased by 32%.
In Italy, the share of managerial roles held by under-35 workers fell from 8% to 3% between 1996 and 2019, while the share held by over-55 workers rose from 12% to 28%.
The age pay gap increased more in slower-growing, older, and larger Italian firms, with a difference of 38% between firms with below-median and above-median employment growth.
In Italy, 78% of the total growth in the age pay gap was attributed to the deterioration in the pay rank of younger workers and the improvement in that of older workers.
Details about the paper
The paper proposes a conceptual framework of negative career spillovers to explain how an increased stock of older workers affects the age pay gap. In this model, firms cannot easily change the contracts of older employees or add higher-ranked positions to their organizations. As a result, a massive supply of older workers and declining economic growth restrict younger workers' access to higher-paying roles, while widening the age-pay gap in favor of older workers. The characteristics of these negative spillovers on younger workers' careers align with the model's predictions.
The bigger picture
The widening age-pay gap is not solely driven by higher returns to experience or skills possessed by older workers. Instead, the paper finds that the primary cause is the difference in the positions of older and younger workers within the wage distribution, with younger workers facing increasing difficulties in getting a better position, let alone the top. The paper also examines alternative explanations, such as wage inequality, sectoral and occupational shifts, domestic outsourcing, and changes in workforce composition, but finds little support for these being the main drivers of the expanding age pay gap.
Going forward
The long-term effects of this trend on younger workers' career trajectories and life decisions remain to be seen. Policymakers and employers may need to address the widening age pay gap to ensure a more balanced labor market and support the aspirations of younger generations. Future research should investigate the potential long-term implications of negative career spillovers beyond slowed career progression for younger workers, such as the impact on their ability to purchase durables, invest in real estate, or start families. Additionally, the study suggests that negative career spillovers may have different repercussions on the careers of younger men compared to younger women, potentially affecting the gender pay gap as well.