July 13, 2021
with N. Bianchi
This study investigates why high-income countries experienced a growing wage dis- parity between older and younger workers. We propose a conceptual framework of the labor market where the contracts of older employees are imperfectly renegotiable and firms face constraints on adding higher-ranked positions. In this model, a larger supply of older workers, together with declining economic growth, restricts younger workers’ access to higher-paying roles and widens the age pay gap. Drawing on extensive adminis- trative and survey data, we document the negative spillovers on younger workers’ careers that are predicted by model. As older workers enjoy more successful careers, younger workers face lower wages and slower career progression. The gap between younger and older workers increases more in slower-growing, older, and larger firms, where these spillovers are expected to be larger. Moreover, younger employees become less likely to work for higher-paying firms, where older workers become more entrenched over time, and lose positions within both high- and low-paying firms. We conclude by connecting these outcomes to alternative explanations, which receive little empirical support.