Explaining Cross-Cohort Differences in Life Cycle Earnings

54 Pages Posted: 4 Nov 2015 Last revised: 6 Mar 2019

See all articles by Yu-Chien Kong

Yu-Chien Kong

La Trobe University

B. Ravikumar

Federal Reserve Bank of Saint Louis

Guillaume Vandenbroucke

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: 2015-10-01

Abstract

College-educated workers entering the labor market in 1940 experienced a 4-fold increase in their labor earnings between the ages of 25 and 55; in contrast, the increase was 2.6-fold for those entering the market in 1980. For workers without a college education these figures are 3.6-fold and 1.5-fold, respectively. Why are earnings profiles flatter for recent cohorts? We build a parsimonious model of schooling and human capital accumulation on the job and calibrate it to earnings statistics of workers from the 1940 cohort. The model accounts for 99 percent of the flattening of earnings profiles for workers with a college education between the 1940 and the 1980 cohorts (52 percent for workers without a college education). The flattening in our model results from a single exogenous factor: the increasing price of skills. The higher skill price induces (i) higher college enrollment for recent cohorts and thus a change in the educational composition of workers and (ii) higher human capital at the start of work life for college-educated workers in the recent cohorts, which implies lower earnings growth over the life cycle.

Keywords: Life-cycle earnings, flattening, skill price, education composition

JEL Classification: E20, I26, J24, J31

Suggested Citation

Kong, Yu-Chien and Ravikumar, B. and Vandenbroucke, Guillaume, Explaining Cross-Cohort Differences in Life Cycle Earnings (2015-10-01). FRB St. Louis Working Paper No. 2015-35. Available at SSRN: https://ssrn.com/abstract=2686078

Yu-Chien Kong (Contact Author)

La Trobe University ( email )

Department of Economics and Finance
Victoria 3552, 3086
Australia

B. Ravikumar

Federal Reserve Bank of Saint Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Guillaume Vandenbroucke

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States
+1 314 444 8717 (Phone)

HOME PAGE: http://www.guillaumevdb.net/

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