Countries for Old Men: An Analysis of the Age Pay Gap

This study investigates the growing wage disparity between older and younger workers in high-income countries. 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 and declining economic growth restrict younger workers' access to higher-paying roles and widen the age pay gap. Drawing on extensive administrative and survey data, we document the negative spillovers on younger workers' careers predicted by the model. As older workers enjoy more successful careers, younger workers become less likely to hold higher-ranked jobs and fall toward the bottom of the wage distribution. The pay gap between younger and older workers increases more in slower-growing, older, and larger firms and in firms with higher mean wages, where these spillovers are more substantial. Moreover, younger employees become less likely to work for higher-paying firms, where older workers become increasingly entrenched over time. Finally, we connect these outcomes to alternative explanations, which receive little empirical support.