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

Abstract

This study investigates the growing wage disparity between older and younger workers in high-income countries. We propose a conceptual framework of the labor market in which firms cannot change the contracts of older employees and cannot freely add higher-ranked positions to their organizations. In this model, a larger supply of older workers and declining economic growth restrict younger workers’ access to higher-paying roles and widen the age pay gap in favor of older workers. Drawing on extensive administrative and survey data, we document that the characteristics of these negative spillovers on younger workers’ careers align with the model’s predictions. As older workers enjoy more successful careers, younger workers become less likely to hold higher-ranked jobs and fall toward the bottom of the wage distribution. The pay gap between younger and older workers increases more in slower-growing, older, and larger firms and in firms with higher mean wages, where these negative spillovers on younger workers are larger in magnitude. Moreover, younger employees become less likely to work for higher-paying firms, whose share of older workers disproportionately increases over time. Finally, we show that alternative explanations for these findings receive little empirical support.

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