Why Are Life-Cycle Earnings Profiles Getting Flatter?

Life-cycle earnings profiles are becoming flatter. The earnings growth over the life cycle for workers in the 1980 cohort was substantially less than the earnings growth for workers in the 1940 cohort (Table 1). We divide a worker’s life cycle into two periods: ages 20 to 39 and ages 40 to 59. We refer to workers aged 20-39 in year t as cohort t. We compute life-cycle earnings growth as the ratio of earnings between the first and second periods of working life. For the 1940 cohort, real earnings grew between the first and second periods by a factor of 2.22 for the high school-educated workers and by 2.52 for the college-educated workers.1 For the 1980 cohort, real earnings grew by a factor of only 1.31 for the high schooleducated workers and by only 1.84 for the college-educated workers. Put differently, Table 1 documents that the life-cycle earnings profiles are becoming flatter. The earnings growth of high school-educated workers in the 1980 cohort is 59.3 percent of the earnings growth of high school educated workers in the 1940 cohort. That is, the life-cycle earnings profile was 40.7 percent flatter for the high school-educated workers in the recent cohort (1− 1.31 2.22 = 40.7 percent ). Similarly, the life-cycle earnings profile for college-educated workers in the 1980 cohort was 26.9 percent flatter than that for college-educated workers in The authors present a simple, two-period model of human capital accumulation on the job and through college attainment. They use a calibrated version of the model to explain the observed flattening of the life-cycle earnings profiles of two cohorts of workers. The model accounts for more than 55 percent of the observed flattening for high school-educated and for college-educated workers. Two channels generate the flattening in the model: selection (or higher college attainment) and a higher skill price for the more recent cohort. Absent selection, the model would have accounted for no flattening for high school-educated workers and about 23 percent of the observed flattening for college-educated workers. (JEL E20, I26, J24, J31)