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Licensed Unlicensed Requires Authentication Published by De Gruyter July 5, 2017

Accounting for changing returns to experience

Lutz Hendricks

Abstract

Returns to experience for U.S. workers have changed over the post-war period. This paper argues that a simple model goes a long way towards replicating these changes. The model features three well-known ingredients: (i) an aggregate production function with constant skill-biased technical change; (ii) cohort qualities that vary with average years of schooling; and crucially (iii) time-invariant age-efficiency profiles. The model quantitatively accounts for changes in longitudinal and cross-sectional returns to experience, as well as the differential evolution of the college wage premium for young and old workers.

Acknowledgments

For helpful comments, I thank Gueorgui Kambourov (the Editor) and two anonymous referees.

Appendix

A Data details

Figure 8A shows estimated average years of schooling by cohort. Figure 8B shows the cumulative fraction of persons in each school group. The key (well-known) data feature is a large expansion of education which strops abruptly around the 1950 birth cohort.

Figure 8: Cohort schooling. (A) Average years of schooling, (B) fraction in each school group.

Figure 8:

Cohort schooling. (A) Average years of schooling, (B) fraction in each school group.

B Estimation results

Figure 9 shows log median wages estimated from CPS data and log skill prices implied by the model. Aside from linear trends, which are not identified without strong assumptions on cohort qualities, skill prices evolve quite similarly to median wages.

Figure 9: Skill prices and wages. (A) HSD, (B) HSG, (C) CD, (D) CG.

Figure 9:

Skill prices and wages. (A) HSD, (B) HSG, (C) CD, (D) CG.

C Model fit

Figure 10 through Figure 12 compare the observed and model predicted age-wage profiles for selected cohorts.

Figure 10: Model fit: HSD.

Figure 10:

Model fit: HSD.

Figure 11: Model fit: CD.

Figure 11:

Model fit: CD.

Figure 12: Model fit: CG.

Figure 12:

Model fit: CG.

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Published Online: 2017-7-5

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