An explanation of the increasing age premium
by Constantine Kapsalis
Business
and Labour Market Analysis Division
Analytical Studies Branch research paper
series, No. 112
The study examines the reason for the significant increase
in the 'age premium' over the period 1981-94. The age premium refers to the percentage
difference in hourly earnings between 'younger' (25-34) and 'older' (45-54) workers.
In 1994, the hourly rate of older males was 32.4% higher than that of younger
males. The corresponding age premium among females was 15.5%. Over the period
1981-94, the age premium increased by 15.7 percentage points among males and 19.5
percentage points among females.
Evidence based on analysis of the Survey
of Consumer Finances (SCF) public use microdata shows that, while there has been
a trend toward non-standard employment, this so far has affected mostly workers
under age 25 and cannot explain the rise in the age premium between ages 25-to-34
and 45-to-54, which is the focus of this study.
A more likely explanation
identified by the study is the dramatic improvement in the level of education
of older workers over the last 14 years. For example, from 1981 to 1994 the percentage
of older male workers with grade 10 education or less declined from 41.9% to 19.6%,
while the percentage with post-secondary diplomas and degrees increased from 32.1%
to 51.7%. The education level of younger male workers also improved over the same
period, but the rate of improvement was smaller and, by 1994, there was virtually
no difference in the incidence of post-secondary diplomas and degrees between
younger and older workers. Similar trends took place among female workers. Shift-share
analysis shows that the narrowing of the education gap between older and younger
workers explains 44% of the age premium rise among male employees and 50% of the
age premium rise among female employees.
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the full publication.
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