their skills and the opportunities in the workplace; and eventually to decline either as (or if) their skills decline or their specific human capital and experience depreciate.
A central issue in this context is the age distribution of productivity for the workforce. Changes in aggregate productivity arise from the interaction of the age distribution of productivity and the changing age distribution of the labor force. This can be called the “age composition effect.” A plot of this effect would be analogous to the productivity curve shown in Figure 6-1, although it would look quite different. There are two alternative approaches to estimating the age composition effect. The first examines the age distribution of earnings and assumes that earnings are proportional to productivity. The second looks directly at the impact of the age distribution on aggregate productivity.
Earnings and the Changing Distribution of the Workforce
There is a vast literature on the distribution of earnings by different attributes, including age, experience, and education. A recent survey of this approach summarized the results as follows:
Perhaps the most widely estimated regression equation in economics is Mincer’s log-earnings function that relates the log of individual earnings or wages to observed measures of schooling and potential work experience. The regression has been estimated in numerous studies, employing various data sets from almost every historical period and country for which micro data are available, with remarkably robust regularities. First, workers’ wage profiles are well ranked by education level; at any experience level, workers earn more, on average, as their schooling increases. Second, average wages grow at a decreasing rate until late in one’s working lifetime. (Rubinstein and Weiss, 2006, p. 3)
In the simplest approach, with perfectly competitive markets, a worker’s hourly earnings are equal to the value of the marginal product of an hour worked. This relationship would hold even if the worker is investing in general (non-firm-specific) human capital. Labor economists have reservations about this theory. The link between current earnings and current marginal productivity may be decoupled if there are long-term relations or contracts between the worker and the company. In some areas, for example, compensation is back-loaded to provide incentives for workers to stay with companies. Additionally, most earnings estimates exclude fringe benefits such as health care, which are an increasingly important fraction of total compensation. While labor economists generally believe that fringe benefits are a dollar-for-dollar substitute for wages, this may hold for the company and is unlikely to hold for individual workers in large companies, so ex-