Skip to main content
SpringerLink
Log in

Are older workers overpaid? A literature review

International Tax and Public Finance volume 18, pages 436–460 (2011)Cite this article

Abstract

It is widely believed that wage and productivity profiles of individual workers do not coincide at all ages. We give an overview of the theories which provide a rationale for this, and discuss the empirical literature. Human capital theories typically imply that wages rise with tenure, so that job reallocation at old age would imply a wage cut. Incentive theories typically imply that wages exceed productivity at the end of a worker’s career. Bargaining power of unions may also lead to ‘overpayment’ of older workers. Some general conclusions regarding the wages of older workers are formulated on basis of the authors’ reading of the empirical literature.

This is a preview of subscription content, access via your institution.

Access options

Buy single article

Instant access to the full article PDF.

USD 39.95

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

References

  • Abowd, J., Kramarz, F., & Margolis, D. (1999). High-wage workers and high-wage firms. Econometrica, 67, 251–333.

    Article  Google Scholar 

  • Abowd, J., Kramarz, F., & Roux, S. (2006). Wages, mobility and firm performance: Advantages and insights from using matched worker-firm data. Economic Journal, 116, F245–F285.

    Article  Google Scholar 

  • Abraham, K., & Farber, H. (1987). Job duration, seniority, and earnings. American Economic Review, 77(3), 278–297.

    Google Scholar 

  • Abraham, K., & Farber, H. (1988). Returns to seniority in union and nonunion jobs: A new look at the evidence. Industrial & Labor Relations Review, 42(1), 3–19.

    Article  Google Scholar 

  • Acemoglu, D., & Pischke, J. (1999). The structure of wages and investment in general training. Journal of Political Economy, 107(3), 539–572.

    Article  Google Scholar 

  • Akerlof, G., & Katz, L. (1989). Workers’ trust funds and the logic of wage profiles. Quarterly Journal of Economics, 104(3), 525–536.

    Article  Google Scholar 

  • Akerlof, G., & Yellen, J. (1990). The fair-wage effort hypothesis and unemployment. Quarterly Journal of Economics, 55, 255–283.

    Article  Google Scholar 

  • Altonji, J., & Shakotko, R. (1987). Do wages rise with job seniority? Review of Economic Studies, 54(3), 437–459.

    Article  Google Scholar 

  • Altonji, J., & Williams, N. (1997). Do wages rise with seniority? A reassessment. Industrial and Labor Relations Review, 58(3), 370–397.

    Google Scholar 

  • Baker, G. (1992). Incentive contracts and performance measurement. Journal of Political Economy, 100, 598–614.

    Article  Google Scholar 

  • Baker, G., Gibbs, M., & Holmstrom, B. (1994a). The internal economics of the firm: Evidence from personnel data. Quarterly Journal of Economics, 109, 881–919.

    Article  Google Scholar 

  • Baker, G., Gibbs, M., & Holmstrom, B. (1994b). The wage policy of a firm. Quarterly Journal of Economics, 109(4), 921–955.

    Article  Google Scholar 

  • Ballou, D., & Podgursky, M. (2002). Returns to seniority among public school teachers. Journal of Human Resources, 37(4), 892–912.

    Article  Google Scholar 

  • Becker, G. (1964). Human capital. New York: Columbia University Press.

    Google Scholar 

  • Becker, G., & Stigler, G. (1974). Law enforcement, malfeasance, and compensation of enforcers. Journal of Legal Studies, 3, 1–18.

    Article  Google Scholar 

  • Beffy, M., Buchinsky, M., Fougère, D., Kamionka, T., & Kramarz, F. (2006). The returns to seniority in France (and why are they lower than in the United States?) (IZA Discussion Paper 1935).

  • Bewley, T. (1999). Why wages don’t fall during a recession. Cambridge: Harvard University Press.

    Google Scholar 

  • Bishop, J. (1987). The recognition and reward of employee performance. Journal of Labor Economics, 5(4), S36–S56.

    Article  Google Scholar 

  • Blinder, A., & Choi, D. (1990). A shred of evidence on theories of wage stickiness. Quarterly Journal of Economics, 105, 1003–1015.

    Article  Google Scholar 

  • Boot, H. (1995). How skilled were Lancashire cotton factory workers in 1833? Economic History Review, 2, 283–303.

    Google Scholar 

  • Booth, A., & Frank, J. (1996). Seniority, earnings and unions. Economica, 63, 673–686.

    Article  Google Scholar 

  • Börsch-Supan, A., Düzgün, I., & Weiss, M. (2006). Age and productivity: Evidence from the assembly line (Mimeo). Universität Mannheim.

  • Bovenberg, A., & Teulings, C. (2008). Rhineland exit (CPB Discussion Paper 101).

  • Brown, J. (1989). Why do wages increase with tenure? On-the-job training and life-cycle wage growth observed within firms. American Economic Review, 79(5), 971–991.

    Google Scholar 

  • Buchinsky, M., Fougère, D., Kramarz, F., & Tchernis, R. (2005). Interfirm mobility, wages, and the returns to seniority and experience in the US (IZA Discussion Paper 1521).

  • Bull, C. (1987). The existence of self-enforcing implicit contracts Quarterly Journal of Economics, 102, 147–159.

    Article  Google Scholar 

  • Bull, C., Schotter, A., & Weigelt, K. (1987). Tournaments and piece rates: An experimental study. Journal of Political Economy, 95(1), 1–33.

    Article  Google Scholar 

  • Burdett, K., & Coles, M. (2003). Equilibrium wage-tenure contracts. Econometrica, 71(5), 1377–1404.

    Article  Google Scholar 

  • Carmichael, L. (1985). Can unemployment be involuntary? American Economic Review, 75, 1213–1214.

    Google Scholar 

  • Clark, R., & Ogawa, N. (1992). The effect of mandatory retirement on earnings profiles in Japan. Industrial and Labor Relations Review, 45(2), 258–266.

    Article  Google Scholar 

  • Crepon, B., Deniau, N., & Perez-Duarte, S. (2003). Wages, productivity, and worker characteristics: A French perspective (INSEE Working Paper 2003-04).

  • Daniel, K., & Heywood, J. (2007). The determinants of hiring older workers: UK evidence. Labour Economics, 14, 35–51.

    Article  Google Scholar 

  • de Hek, P., & van Vuuren, D. (2010). Are older workers overpaid? A literature review (CPB Discussion Paper 165). CPB Netherlands Bureau for Economic Policy Analysis.

  • Dickens, W., Katz, L., Lang, K., & Summers, L. (1989). Employee crime and the monitoring puzzle. Journal of Labor Economics, 7(3), 331–347.

    Article  Google Scholar 

  • Dohmen, T., & Falk, A. (2006). Performance pay and multi-dimensional sorting: Productivity, preferences and gender (IZA Discussion Paper 2001).

  • Dostie, B. (2005). Job turnover and returns to seniority. Journal of Business and Economic Statistics, 23(2), 192–199.

    Article  Google Scholar 

  • Dostie, B. (2006). Wages, productivity and aging (HEC Montreal Research Paper No. IEA-06-15).

  • Dustmann, C., & Meghir, C. (2005). Wages, experience and seniority. Review of Economic Studies, 72, 77–108.

    Article  Google Scholar 

  • Fair, R. (1994). How fast do old men slow down? Review of Economics and Statistics, 76, 103–118.

    Article  Google Scholar 

  • Farber, H. (1999). Mobility and stability: The dynamics of job change in labor markets. In O. Ashenfelter & D. Card (Eds.), Handbook of labor economics (Vol. 3, pp. 2439–2483). Amsterdam: Elsevier.

    Google Scholar 

  • Fehr, E., & Falk, A. (1999). Wage rigidity in a competitive incomplete market. Journal of Political Economy, 107(1), 106–134.

    Article  Google Scholar 

  • Fehr, E., & Schmidt, K. (2004). Fairness and incentives in a multi-task principal-agent model. Scandinavian Journal of Economics, 106(3), 453–474.

    Article  Google Scholar 

  • Flabbi, L., & Ichino, A. (2001). Productivity, seniority and wages: New evidence from personnel data. Labour Economics, 8, 359–387.

    Article  Google Scholar 

  • Frank, J. (1985). Trade union efficiency and overemployment with seniority-wage scales. Economic Journal, 95, 1021–1034.

    Article  Google Scholar 

  • Frank, R., & Hutchens, R. (1993). Wages, seniority, and the demand for rising consumption profiles. Journal of Economic Behavior and Organization, 21(3), 251–276.

    Article  Google Scholar 

  • Frank, J., & Malcomson, J. (1994). Trade unions and seniority employment rules. European Economic Review, 38, 1595–1611.

    Article  Google Scholar 

  • Franz, W., & Soskice, D. (1995). The German apprenticeship system. In F. Buttler, W. Franz, R. Schettkat, & D. Soskice (Eds.), Institutional frameworks and labour-market performance (pp. 208–234). London: Routledge.

    Google Scholar 

  • Grout, P. (1984). Investment and wages in the absence of binding contracts: A Nash bargaining approach. Econometrica, 52, 449–460.

    Article  Google Scholar 

  • Harbring, C., & Irlenbusch, B. (2003). An experimental study on tournament design. Labour Economics, 10, 443–464.

    Article  Google Scholar 

  • Hellerstein, J., & Neumark, D. (1995). Are earnings profiles steeper than productivity profiles? Evidence from Israeli firm-level data. Journal of Human Resources, 30(1), 89–112.

    Article  Google Scholar 

  • Hellerstein, J., & Neumark, D. (2004). Production function and wage equation estimation with heterogeneous labor: Evidence from a new matched employer-employee data set (NBER Working Paper 10325).

  • Hellerstein, J., Neumark, D., & Troske, K. (1999). Wages, productivity, and worker characteristics: Evidence from plant-level production functions and wage equations. Journal of Labor Economics, 17, 409–446.

    Article  Google Scholar 

  • Heywood, J., Jirjahn, U., & Tsertsvardze, G. (2010). Hiring older workers and employing older workers: German evidence. Journal of Population Economics, 23(2), 595–615.

    Article  Google Scholar 

  • Holmstrom, B., & Milgrom, P. (1990). Regulating trade among agents. Journal of Institutional and Theoretical Economics, 146(1), 85–105.

    Google Scholar 

  • Huck, S., Seltzer, A., & Wallace, B. (2004), Deferred compensation and gift exchange: An experimental investigation into multi-period labor markets (IZA Discussion Paper 1193).

  • Hutchens, R. (1986). Delayed payment contracts and a firm’s propensity to hire older workers. Journal of Labor Economics, 4, 439–457.

    Article  Google Scholar 

  • Hutchens, R. (1987). A test of Lazear’s theory of delayed payment contracts. Journal of Labor Economics, 5, 153–170.

    Article  Google Scholar 

  • Ilmakunnas, P., & Maliranta, D. (2005). Technology, labour turnover and wage productivity gaps. Oxford Bulletin of Economics and Statistics, 67(5), 623–645.

    Article  Google Scholar 

  • Johnson, R., & Neumark, D. (1996). Wage declines among older men. Review of Economics and Statistics, 78(4), 740–748.

    Article  Google Scholar 

  • Kaufman, R. (1984). On wage stickiness in Britain’s competitive sector. British Journal of Industrial Relations, 22, 101–112.

    Article  Google Scholar 

  • Klein, B., & Leffler, K. (1981). The role of market forces in assuring contractual performance. Journal of Political Economy, 89, 615–632.

    Article  Google Scholar 

  • Kotlikoff, L. J., & Gokhale, J. (1992). Estimating a firm’s age-productivity profile using the present value of workers’ earnings. Quarterly Journal of Economics, 107, 1215–1242.

    Article  Google Scholar 

  • Krueger, A. (1991). Ownership, agency, and wages: A study of the fast-food industry. Quarterly Journal of Economics, 106(1), 75–101.

    Article  Google Scholar 

  • Krueger, A., & Summers, L. (1988). Efficiency wages and the inter-industry wage structure. Econometrica, 56, 259–293.

    Article  Google Scholar 

  • Kuhn, P. (1988). A nonuniform pricing model of union wages and employment. Journal of Political Economy, 96, 473-508.

    Article  Google Scholar 

  • Kuhn, P., & Robert, J. (1989). Seniority and distribution in a two-worker trade union. Quarterly Journal of Economics, 104, 485–505.

    Article  Google Scholar 

  • Kuhn, P., & Sweetman, A. (1999). Vulnerable seniors: Unions, tenure, and wages following permanent job loss. Journal of Labor Economics, 17(4), 671–693.

    Article  Google Scholar 

  • Lallemand, T., & Rycx, F. (2009). Are older workers harmful for firm productivity? De Economist, 157(3), 273–292.

    Article  Google Scholar 

  • Lazear, E. (1979). Why is there mandatory retirement. Journal of Political Economy, 87, 1261–1284.

    Article  Google Scholar 

  • Lazear, E. (1981). Agency, earnings profiles, productivity, and hours restrictions. American Economic Review, 71, 606–620.

    Google Scholar 

  • Lazear, E. (1983). Pensions as severance pay. In Z. Bodie & J. Shoven (Eds.), Financial aspects of the United States pension system Chicago: University of Chicago Press.

    Google Scholar 

  • Lazear, E. (1988). Adjusting to an aging labor force (NBER Working Paper 2802).

  • Lazear, E. (1989). Pay equality and industrial politics. Journal of Political Economy, 97, 561–580.

    Article  Google Scholar 

  • Lazear, E. (2000). The future of personnel economics. Economic Journal, 110, F611–F639.

    Article  Google Scholar 

  • Lazear, E., & Moore, R. (1984). Incentives, productivity, and labor contracts. Quarterly Journal of Economics, 99, 275–296.

    Article  Google Scholar 

  • Lazear, E., & Rosen, S. (1981). Rank-order tournaments as optimum labor contracts. Journal of Political Economy, 89(5), 841–864.

    Article  Google Scholar 

  • Loewenstein, G., & Sicherman, N. (1991). Do workers prefer increasing wage profiles? Journal of Labor Economics, 9(1), 67–84.

    Article  Google Scholar 

  • Malcomson, J. (1984). Work incentives, hierarchy, and internal labor markets. Journal of Political Economy, 92, 486–507.

    Article  Google Scholar 

  • Malcomson, J. (1986). Rank-order contracts for a principal with many agents. Review of Economic Studies, 53(5), 807–817.

    Article  Google Scholar 

  • Malcomson, J. (1999). Individual employment contracts. In O. Ashenfelter & D. Card (Eds.), Handbook of labor economics (Vol. 3, pp. 2291–2371). Amsterdam: Elsevier. Chap. 35.

    Google Scholar 

  • McCue, K. (1996). Promotions and wage growth. Journal of Labor Economics, 14, 175–209.

    Article  Google Scholar 

  • Medoff, J., & Abraham, K. (1980). Experience, performance, and earnings. Quarterly Journal of Economics, 95, 703–736.

    Article  Google Scholar 

  • Medoff, J., & Abraham, K. (1981). Are those paid more really more productive? The case of experience. Journal of Human Resources, 16, 186–216.

    Article  Google Scholar 

  • Milgrom, P., & Roberts, J. (1992). Economics, organization, and management. Englewood Cliffs: Prentice-Hall.

    Google Scholar 

  • Mincer, J. (1970). The distribution of labor incomes: A survey with special reference to the human capital approach. Journal of Economic Literature, 8(1), 1–26.

    Google Scholar 

  • Mincer, J. (1997). The production of human capital and the life cycle of earnings: Variation on a theme. Journal of Labor Economics, 15(1), 26–47.

    Article  Google Scholar 

  • Mookherjee, D. (1984). Optimal incentive schemes with many agents. Review of Economic Studies, 51, 433–446.

    Article  Google Scholar 

  • Neal, D., & Rosen, S. (2000). Theories of the distribution of earnings. In A. Atkinson & F. Bourguignon (Eds.), Handbook of income distribution (pp. 379–427). Amsterdam: Elsevier. Chap. 7.

    Google Scholar 

  • Neumark, D. (1995). Are rising wage profiles a forced-savings mechanism? Economic Journal, 105, 95–106.

    Article  Google Scholar 

  • Oster, S., & Hamermesh, D. (1998). Aging and productivity among economists. Review of Economics and Statistics, 80(1), 154–156.

    Article  Google Scholar 

  • Prendergast, C. (1993). The role of promotion in inducing specific human capital acquisition. Quarterly Journal of Economics, 108, 523–534.

    Article  Google Scholar 

  • Rosen, S. (1986). Prizes and incentives in elimination tournaments. American Economic Review, 76, 701–715.

    Google Scholar 

  • Seltzer, A., & Merrett, D. (2000). Personnel practices at the union bank of Australia: Panel evidence from the 1887–1900 entry cohorts. Journal of Labor Economics, 18, 573–613.

    Article  Google Scholar 

  • Shaked, A., & Sutton, J. (1984). Involuntary unemployment as a perfect equilibrium in a bargaining model. Econometrica, 52(6), 1351–1364.

    Article  Google Scholar 

  • Shapiro, C. (1983). Premiums for high quality products as rents to reputations. Quarterly Journal of Economics, 98, 659–679.

    Article  Google Scholar 

  • Shapiro, C., & Stiglitz, J. (1984). Equilibrium unemployment as a worker discipline device. American Economic Review, 74, 433–444.

    Google Scholar 

  • Shaw, K., & Lazear, E. (2007). Tenure and output (NBER Working Paper 13652).

  • Skirbekk, V. (2004). Age and individual productivity: A literature survey. In G. Feichtinger (Ed.), Vienna yearbook of population research (pp. 133–153). Vienna: Austrian Academy of Sciences Press.

    Google Scholar 

  • Stevens, M. (1994). A theoretical model of on-the-job training with imperfect competition. Oxford Economic Papers, 46(4), 537–562.

    Google Scholar 

  • Stevens, M. (2004). Wage-tenure contracts in a frictional labour market: Firms’ strategies for recruitment and retention. Review of Economics and Statistics, 71(2), 535–551.

    Article  Google Scholar 

  • Topel, R. (1991). Specific capital, mobility, and wages: Wages rise with job seniority. Journal of Political Economy, 99, 145–176.

    Article  Google Scholar 

  • Tracey, J. (1986). Seniority rules and the gains from union organization (NBER Working Paper 2039).

  • van Ours, J. (2009). Will you still need me: When I’m 64? De Economist, 157(4), 441–460.

    Article  Google Scholar 

  • van Ours, J., & Stoeldraijer, L. (2010). Age, wage and productivity (IZA Discussion Paper 4765).

  • Weiss, Y. (1985). The effect of labor unions on investment in training: A dynamic model. Journal of Political Economy, 93, 994–1007.

    Article  Google Scholar 

  • Williams, N. (2009). Seniority, experience, and wages in the UK. Labour Economics, 16, 272–283.

    Article  Google Scholar 

  • Yamaguchi, S. (2007). The effect of match quality and specific experience on career decisions and wage growth (Mimeo). McMaster University.

  • Zangelidis, A. (2008). Seniority profiles in unionized workplaces: Do unions still have the edge? Oxford Bulletin of Economics and Statistics, 70(3), 327–345.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics, Erasmus School of Economics, P.O. Box 1738, 3000 DR, Rotterdam, The Netherlands

    Paul de Hek

  2. Department of Social Security, CPB Netherlands Bureau of Economic Policy Analysis, P.O. Box 80510, 2508 GM, Den Haag, The Netherlands

    Daniel van Vuuren

Authors
  1. Paul de Hek
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Daniel van Vuuren
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Daniel van Vuuren.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

de Hek, P., van Vuuren, D. Are older workers overpaid? A literature review. Int Tax Public Finance 18, 436–460 (2011). https://doi.org/10.1007/s10797-011-9162-3

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10797-011-9162-3

Keywords

JEL Classification

search

Navigation