Working Paper: NBER ID: w28733
Authors: David J. Deming
Abstract: Machines increasingly replace people in routine job tasks. The remaining tasks require workers to make open-ended decisions and to have “soft” skills such as problem-solving, critical thinking and adaptability. This paper documents growing demand for decision-making and explores the consequences for life-cycle earnings. Career earnings growth in the U.S. more than doubled between 1960 and 2017, and the age of peak earnings increased from the late 30s to the mid-50s. I show that a substantial share of this shift is explained by increased employment in decision-intensive occupations, which have longer and more gradual periods of earnings growth. To understand these patterns, I develop a model that nests decision-making in a standard human capital framework. Workers predict the output of uncertain, context-dependent actions. Experience reduces prediction error, improving a worker’s ability to adapt using data from similar decisions they have made in the past. Experience takes longer to accumulate in high variance, non-routine jobs. I test the predictions of the model using data from the three waves of the NLS. Life-cycle wage growth in decision-intensive occupations has increased over time, and it has increased relatively more for highly-skilled workers.
Keywords: decision-making; automation; lifecycle earnings; human capital; wage growth
JEL Codes: I26; J23; J24; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shift towards decision-intensive occupations (J29) | increase in lifecycle wage growth (J39) |
| increased employment in decision-making roles (M51) | shift in age of peak earnings (J26) |
| accumulation of experience in high-variance, non-routine jobs (J24) | improvement in ability to predict outcomes (C53) |
| improvement in ability to predict outcomes (C53) | enhancement of adaptability (O36) |
| enhancement of adaptability (O36) | increase in earnings potential (J31) |
| skill level in decision-intensive occupations (D91) | lifecycle wage growth (J31) |
| relative employment growth in decision-intensive occupations (J29) | shift in age-earnings profiles (J26) |