Demographic Change and the Return to Experience
47 Pages Posted: 23 Apr 2008
Date Written: April 2008
We propose and estimate a model in which changes in the demographic composition of the labor force may aﬀect the returns to labor market experience. We consider workers as providing two distinct productive services - physical eﬀort, or "labor," and services of the skill accumulated with labor market experience, or "experience." The key element in the model is the aggregate production function that allows for complementarity between the appropriately measured aggregate stocks of labor and experience. The parameters of the aggregate technology are identified by estimating individual earnings equations that consistently aggregate. Both time-series and cross-sectional data conﬁrm strong experience-labor complementarity. We ﬁnd that the observed demographic changes that drive the aggregate experience to labor ratio account nearly perfectly for the substantial changes in the experience premium over time.
Keywords: Experience Premium, Return to Experience, Experience-labor Complementarity, Wage Dispersion, Consistent Aggregation
JEL Classification: E24, E25, J24, J31
Suggested Citation: Suggested Citation