Author: Andrew Berger-Gross
In an era of whiplash-inducing uncertainty, one demographic trend stands out for its inevitability: the aging of the Baby Boomer generation. The growing impact of an aging population on labor markets has received considerable attention in recent years, particularly with regard to the labor force participation rate. Less attention has been paid to the relationship between worker age and average wages, which can cause overall income measures to rise as the workforce grows older and decline as these workers retire.
The logic is fairly simple. As workers mature into the twilight of their careers, they reach their highest levels of earning potential. Meanwhile, younger workers — who offer comparatively less on-the-job experience — earn less than their older counterparts. As the workforce as a whole matures into older age groups, overall measures of wages (such as the average wage) may increase. As these mature workers retire and are replaced by new labor market entrants, the average wage may decrease.
The situation in North Carolina provides an illustration. Over the past 20 years, North Carolina’s workforce has matured, with the share of workers aged 45 or older increasing as the share of younger workers has declined.
These workers — especially those in the 45-54 and 55-64 age ranges — are at the peak of the earnings distribution. Moreover, mature workers have seen substantial monthly wage increases during the past 20 years (adjusted for inflation), while wages for workers under 35 have stagnated.
The combination of these two trends — a maturing workforce and a higher earnings premium for mature workers — has resulted in a nearly 20 percent increase in North Carolina’s average wage (inflation adjusted) over two decades. This overall wage increase would have been notably smaller if the workforce had not grown older. In fact, nearly all of the real wage gain since 1999 can be attributed to workforce maturation.*
The big question will be what happens to incomes once the Boomers start retiring. Austin Nichols, an economist at the Urban Institute, was quoted in Bloomberg Businessweek describing the situation as follows: “When baby boomers hit peak earning time, wages were forced up, budgets looked good, everything was very rosy. Policymakers forget that someone has to pay for that pig in the snake when the pig retires, and we’re experiencing the leading edge of that.”
The coming years will bring numerous challenges as the Boomer generation exits the workforce and the Millennials struggle to find a foothold in the new economy. It is possible that average wages will decline during this period of transition. Workforce and economic development professionals should prepare accordingly.
General disclaimers:
Estimates from the Quarterly Workforce Indicators (QWI) program are based on both survey and administrative data, and are subject to sampling and nonsampling error. Note that the QWI estimates are not directly comparable to official employment or wage estimates from the Current Employment Statistics (CES) program due to differences in methodology and coverage. Any mistakes in data management, analysis, or presentation are the author’s.
Footnotes:
* This analysis is accomplished by separating real average monthly wage into two components — 1) changes in the age group composition of the workforce, and 2) wage changes within each age group, as follows: (WAGEall / #WORKERSall) = Σ(#WORKERSage / #WORKERSall) * Σ(WAGEage / #WORKERSage). I performed this decomposition using Fisher’s “ideal” index, which permits a perfect multiplicative decomposition of change over time without a residual. Index-based decomposition is most commonly used to estimate price level and economy-wide energy and carbon intensity, but is widely applicable to other economic subjects as well.