Countries for Old Men: An Analysis of the Age Pay Gap

Abstract

This paper examines the widening pay gap between older and younger workers in high-income countries. Over the past four decades, the wages of older workers have grown significantly faster than those of younger workers, leading to a steep expansion in the age pay gap. Using detailed administrative data on 29 million workers across 3.5 million firms in Italy, along with data on 15.4 million workers from fourteen other countries, we analyze how workforce aging affects younger workers’ career trajectories. Our findings are consistent with the existence of negative career spillovers: as older workers delay retirement and increasingly hold top jobs, many firms struggle to expand higher-ranked positions enough to preserve access for younger employees, pushing them into lower segments of the wage distribution. Consequently, younger workers increasingly enter the labor market at lower pay levels and experience slower wage growth after entry. They are also less likely to secure employment at higher-paying firms, which become progressively dominated by older workers. Cross-firm instrumental-variable regressions indicate that the deterioration in the career trajectories of younger workers is more pronounced in firms that have experienced more severe workforce aging. Finally, we argue that alternative explanations for these findings receive limited empirical support. These results underscore the challenges facing younger workers in aging economies and highlight the need for labor-market policies that balance the interests of both older and younger generations.

Keywords: wage growth, age pay gap, career spillovers, older workers, labor-market entry, workforce aging

JEL Classification: J31, J21, M51, J11