Variations in steepness of age-earnings profiles: A cross-country analysis focusing on two age groups

This study aims at explaining the observed variations in the ageearnings profiles across countries and over time by focusing on the ratio of the average wage rate in the age group 60-64 to that in the age group 25-29. Accordingly, a panel data set of seventeen OECD countries over 1980-2005 is employed, and four explanatory variables are identified to play a significant role in explaining the dependent variable based on random effects econometric estimations.The first explanatory variable is Average Relative ReplacementRate, which is a rough indicator constructed to approximate the severeness of biased withdraw toward low-skilled elder workers. The second one is Relative Strictness of Employment Protection, which calculates the differences in the level of the strictness of EPL between the old and young to indicate their comparative bargaining powers. Trust Index, the third regressor, provides an indirect interpretation for the different steepness of age-earnings profiles simply through the logics behind the Lazear’s incentive theory and the theory of specific human capital.And the last one is Difference in Higher Education Attainment Rate,which is applied to reflect the productivity differences between the two age groups.In our macro-econometric analysis, around 51 percent of the variationsof dependent variable can be explained by the four independentvariables. Nevertheless, model’s explanatory capabilities would be further improved if micro factors are also taken into account, which could a topic for future studies.