Working Paper: NBER ID: w29523
Authors: Hanming Fang; Xincheng Qiu
Abstract: We study the labor markets in China and the United States, the two largest economies in the world, by examining the evolution of their cross-sectional age-earnings profiles during the past thirty years. We find that, first, the peak age in the cross-sectional age-earnings profiles, which we refer to as the “golden age,” stayed almost constant at around 45-50 in the U.S., but decreased sharply from 55 to around 35 in China; second, the age-specific earnings grew drastically in China, but stayed almost stagnant in the U.S.; third, the cross-sectional and life-cycle age-earnings profiles were remarkably similar in the U.S., but differed substantially in China. We propose and empirically implement a decomposition framework to infer from the repeated cross-sectional earnings data the experience effect (i.e., human capital accumulation over the life cycle), the cohort effect (i.e., inter-cohort human capital growth), and the time effect (i.e., changes in the human capital rental prices over time), under an identifying assumption that the growth of the experience effect stops at the end of one's working career. The decomposition suggests that China has experienced a much larger inter-cohort productivity growth and higher increase in the rental price to human capital, but lower returns to experience, compared to the U.S. We also use the inferred components to revisit several important and classical applications in macroeconomics and labor economics, including growth accounting and the estimation of TFP growth, and the college wage premium and skill-biased technical change.
Keywords: Labor Markets; Age-Earnings Profiles; Human Capital; China; United States
JEL Codes: E24; E25; J24; J31; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| experience effect (C92) | golden age in the US (N92) |
| inter-cohort productivity growth (O49) | golden age in China (B11) |
| inter-cohort productivity growth in China (O49) | age-specific earnings in China (J39) |
| cohort effect (C92) | lifecycle age-earnings profiles in China (J26) |
| time effect (C22) | lifecycle age-earnings profiles in China (J26) |
| experience effect (C92) | stable golden ages in the US (N12) |
| inter-cohort productivity growth (O49) | younger golden ages in China (B11) |