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Title: Imperfect Substitution and Age-Differential Changes in the Wage Structure

Citation Type: Miscellaneous

Publication Year: 2008

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Abstract: During the economic boom of the 1940s, earnings inequality between skilled and unskilled workers narrowed substantially. I first document the rate of wage compression varied by age. Demand factors played crucial roles in the age-differential compression of the wage structure, while institutional factors played little role. The increase in demand in manufacturing during WWII is associated with higher earnings of middle-skilled workers among the young, and the post-war construction boom boosted demand for workers in low-skilled occupations of all ages. Key to variations in compression by age is the differences in substitutability between workers of different ages by skill groups. Among low-skilled workers, young and old workers are highly substitutable, and a high demand for young workers leads to an increase in demand for older workers. For high-skilled workers, however, the substitutability between workers of different ages is low and an increase in demand for young workers does not necessarily translate into high demand for older workers. The paper shows that even an extremely large aggregate shock transmits through the labor market via cohort effects because of imperfect substitutability of workers of different ages.

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Authors: Yamashita, Takashi

Publisher: Reed College

Data Collections: IPUMS USA

Topics: Labor Force and Occupational Structure, Other

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