Wednesday, September 05, 2007

Economic Analysis by Federal Reserve Bank of Boston Suggests Older Workers Face Reduced Wages

A working paper issued by the Federal Reserve Bank of Boston provides strong empirical support for this hypothesis that the increasing relative supply of older workers would lower the wage premium paid for older, more experienced workers.

One consequence of demographic change is substantial shifts in the age distribution of the working age population. As the baby boom generation ages, the usual historical pattern of there being a high ratio of younger workers relative to older workers is increasingly being replaced by a pattern of there being roughly equal percentages of workers of different ages.

According to "Population Aging, Labor Demand, and the Structure of Wages" by Margarita Sapozhnikov and Robert K. Triest, econometric estimates imply that the size of one’s birth cohort affects wages throughout one’s working life, with members of relatively large cohorts (at all stages of their careers) earning a significantly lower wage than members of smaller cohorts. The cohort size effect is of approximately the same magnitude for men and for women. Their results suggest that cohort size effects are quantitatively important and should be incorporated into public policy analyses.
These results imply that older workers will face increasingly unfavorable relative labor market conditions as their ranks become crowded by the baby boom generation in the near future. Although the slowing of labor force growth may create tight labor markets, the pecuniary benefits of labor market tightness will disproportionately accrue to younger, less experienced workers. Loss of defined benefit pensions and increases in Social Security’s normal retirement age may result in baby boomers retiring at older ages than did the birth cohorts that immediately preceded them, but the boomers will suffer from the same cohort crowding effects on wages, as they consider retirement that they did earlier in their careers.
Source: Federal Reserve Bank of Boston Working Paper No. 07-08 (Abstract) (August 27, 2007)

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