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The Experience Premium

Economic Research Institute 2011.12.29 3933

We assess the role of supply, through the demographic changes of the workforce, in accounting for the large changes in the return to labor market experience over time. Using the PSID (1968-2007), we find that the movement of the return to experience is almost perfectly explained by demographic changes alone, with no role attributable to demand shifts. Moreover, these demographic changes account for the differential dynamics of the age premium across education groups emphasized by Katz and Murphy (1992), and account for the differential movements of the college premium across age groups emphasized by Card and Lemieux (2001). Thus, our analysis attributes a key role to demographic change in shaping several empirical regularities that are a focus of active research in macro and labor economics.



1. Introduction 


2. Individual earnings equation
  1. Individual experience and labor supplies
  2. Estimation of individual earnings
  3. Results


3. Aggregate technology

  1. Estimation of aggregate technology
  2. Results
  3. Robustness


4. Rate of return to experience


5. Age premia and college premia

  1. Age premium across schooling groups
  2. College premium across age groups


6. Cross section estimation


7. Conclusion