Pay Trajectories for Younger and Older Workers in Europe

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This figure is a line graph titled, Pay Gaps by Age in Italy. The y-axis is labeled, Mean weekly wages, 2015 euros. It ranges from 300 to 800 euros, increasing in increments of 100. The x-axis is labeled, age. It ranges from 20 to 65. The graph illustrates mean weekly wages by age for the years 1985 and 2019. Both lines start at approximately 325 euros for age 20 but begin to diverge after age 23. While both lines show a general upward trend as age increases, the 2019 line demonstrates a steeper increase. At age 40, the mean weekly wage was about 500 euros in 1985 compared to about 600 euros in 2019. The 1985 line generally plateaus around 500 euros after age 40, with individuals at age 55 earning about 525 euros. In contrast, the 2019 line continues to rise, reaching about 700 euros for individuals at age 55. Notably, the gap between the 1985 and 2019 lines widens with increasing age, indicating a more pronounced difference in wages for older age groups between these two years. The source line reads, Source: Researchers’ calculations using data from the Italian National Social Security Institute (INPS).

As the workforce in Europe and the US has grown older, the average wages of older workers have risen more rapidly than those of their younger colleagues. This seems inconsistent with a simple supply-and-demand analysis, which would suggest that as the supply of older workers grows, their wages should fall; it raises the question of what other factors could be responsible for the growing age-pay gap.

In Countries for Old Men: An Analysis of the Age-Pay Gap (NBER Working Paper 32340), Nicola Bianchi and Matteo Paradisi analyze administrative data covering 38 million workers at 3.7 million firms in Italy and Germany, along with survey data on an additional 6.6 million workers from 14 high-income countries, to test whether the presence of older workers in a firm has negative career spillover effects on its younger workers.

The difference in the rates of wage growth between those under 35 and those over 55 is greater in older, larger firms with slower employment growth.

The researchers document that the wage rate growth of younger workers has slowed, and that these workers have struggled to secure more senior positions. In Italy, the likelihood that workers under 35 are in the top quarter of earners declined by 34 percent between 1985 and 2019, while the probability of being in the top quartile of earners rose for those over 55 by roughly the same amount. During the same period, the share of managerial roles held by workers under 35 fell from 8 to 3 percent, while the share held by workers over 55 rose from 12 to 28 percent. These divergent trends, rather than changes in the level of wages paid to workers at different ranks, are responsible for most of the growing age-pay gap. Young workers tend to enter the labor market with lower wages than those of older workers, and the typical wage growth experienced by workers during the first few years of their careers has slowed over time.

The age-pay gap has grown more in firms that face constraints on adding higher-ranked positions to their organizational hierarchies: namely older, larger firms with less employment growth. Moreover, the share of firms that fit this description has expanded over time. The pay gap between younger and older workers has expanded more at high-paying than at low-paying firms, while younger workers have also become less likely to secure positions at these firms. Thus, both within-firm and across-firm factors have contributed to the growing pay gap. A rising fraction of older workers work at firms in the top decile of mean pay, and a declining fraction work at firms in the bottom decile.

— Abigail Hiller

The realization of the present article was possible thanks to the sponsorship of the VisitINPS Scholars program.