Fortunately for them, market dynamics will soon turn in their favor.
Today, Baby Boomers earn far more than their younger counterparts—which is to be expected, since older workers generally earn more on average.
What is surprising, however, is that the wage gap between older and younger workers is wider than when Boomers entered the workforce. In fact, the gap between workers over 55 and under 35 grew by 61 percent in the United States between 1979 and 2018.
So why didn’t Baby Boomers see their wages stay low throughout their careers? That is, with Boomers being such a large group, why didn’t they experience the same oversupply (and downward pressure on wages) as they moved into middle and upper-level jobs?
A new study by Kellogg assistant professor of strategy Nicola Bianchi and Matteo Paradisi of the Einaudi Institute for Economics and Finance shows why.
In short, Boomers benefited from a variety of structural changes in the labor market. These shifts—such as delayed retirement, high job commuting costs, and stagnant business growth—have been a boon to older workers, keeping them in higher-paying jobs longer.
This is at the expense of younger workers, who cannot reach the ranks held by older workers. Instead, they face lower wages, slow career growth and more frequent job changes.
“We know that the demographics of workers have changed—the workforce has aged—but the usual supply and demand dynamics haven’t applied,” Bianchi says. “In fact, the opposite is true. And it’s due to macroeconomic changes, not necessarily demographic changes.”
These shifts could spell trouble for businesses looking to recruit and retain new workers, as businesses often can’t offer high wages and the ability to move up the ranks. “It’s going to be one of the biggest problems that companies will face in the coming years,” says Bianchi.
An aging workforce, earning more
Bianchi, a labor economist, was interested in studying the issue of changing workforce demographics after Italy raised the retirement age to 67 in 2011. The move, intended to shore up the country’s pension system, reflected an aging workforce around the world.
In Italy, the average age of workers increased by 19 percent from 1985 to 2019. And, as in America, as the average age of the workforce increased, so did the wages of older workers.
Over the same period, the over-55s in Italy experienced huge average wage increases – 33 percent for 56-year-olds and 53 percent for 65-year-olds. Those under 35, however, only saw wages rise by 14%. The gap in average weekly wages between workers over 55 and under 35 has grown by a staggering 96 per cent.
In fact, the trend—older workers seeing a disproportionate increase in wages—has been found in high-income countries around the world. “We knew that something new had to be happening in the labor markets to explain this,” says Bianchi.
A simple explanation may be the increase in wage inequality—the unequal distribution of wages among groups of people, which has been documented phenomenon in high-income countries. After all, with older workers more likely to be employed in well-paying jobs, they would be the natural beneficiaries of the rich getting richer. But Bianchi speculated that this new phenomenon could alternatively be explained by what he calls “negative career spillovers,” where a growing number of older workers with longer careers reduces access to higher-paying jobs for younger workers.
To study the issue, Bianchi analyzed three data sets: 35 years of confidential administrative data provided by the Italian Social Security Institute; employer-employee social security data provided by the German government; and information on 14 high-income economies, including the United States, from the Luxembourg Income Survey database. Together, these sources include information on more than 44 million workers.
The wage gap is due to the rank gap, not inequality
Bianchi’s analysis painted an increasingly poor career picture for young workers.
In Italy, for example, the likelihood of workers under 35 earning weekly earnings in the top quartile fell by 34 percent from 1985 to 2019. Over the same period, the likelihood of those over 55 earning top quartile wages increased by 32 percent.
To find out why younger workers fared so poorly, Bianchi decided to mathematically quantify the impact of various possible explanations for the age wage gap. It measured changes in the distribution gap (how wages were distributed among all workers, regardless of the movement of younger and older workers in the wage distribution), as well as changes in the rank gap (how many older versus younger workers were placed in different parts of the distribution of wages, regardless of the form of this distribution of wages). If the distributional gap accounted for most of the age wage gap, this would be consistent with an explanation of income inequality. If, on the other hand, the rank gap were the largest contributor, this would be consistent with a negative career explanation.
From this test, he was able to rule out income inequality as the main culprit.
Instead, the researchers’ analysis revealed that the rank gap was the primary driver of the widening wage gap between older and younger workers. That is, the wage gap can be traced back to the increased tendency for older workers to occupy jobs at the top of the wage distribution and vice versa for younger workers—a finding consistent with negative career fluctuations, where older workers are crowded out by younger ones. those for the best paying jobs.
“Older workers have racked up more promotions and hold those positions longer, which means younger workers can no longer reach those levels because there are no more positions available,” Bianchi says.
But why can’t companies just create more high-level positions to accommodate rising younger workers? Researchers believe that before the 1970s, when Boomers entered the labor market, businesses experienced higher growth than today, leading to more openings at the top. Boomers eventually rose to these positions.
While high-growth startups often make the news, the reality is this today most businesses are mature and expands slowly if at all, leading to an inability to create higher positions. That means Boomers have remained in senior positions since this stagnation began, which Bianchi believes began in the late 1970s.
Younger workers lose most of their careers
The analysis also found that over time, workers under 35 became more likely to enter the labor market at progressively lower wages and then see slow wage growth for much of their careers.
This suggests that their situation is not simply the result of experience suddenly becoming more valuable in the workforce, the researchers argue. If younger workers were disproportionately penalized for inexperience (compared to their older counterparts, who entered the workforce when experience was less important), one would expect to see them earn low wages for a while, “but at some point, they will they have to earn more because they’re getting more experienced,” says Bianchi. “But we don’t see that. The first 18 years of their career they keep losing. Their wage growth over time is worse than it used to be.”
The problem for younger workers is compounded by the fact that the concentration of older workers has increased even more among the highest-paid firms.
“Older workers tend to stick with a job longer if it pays more, which gives them a huge advantage,” says Bianchi. Locked out of high-paying businesses, younger workers are relegated to lower-paying companies and must rely on job hunting to advance their careers. In Italy, the percentage of workers under 35 who quit or lost their job rose from 27 percent in 1985 to 44 percent in 2019.
But job hunting has proven to be an increasingly ineffective career strategy for young workers. The figures show that younger Italian workers’ economic gains from business-to-business commuting have also fallen by 34 percent over time.
“Over time, their moves from business to business result in lower monetary gains,” says Bianchi. “They’re becoming more likely to move and more willing to move for less.”
The problem will remain after the Baby Boomers retire
But we are not in the middle of it great Baby Boomer pension? Will these issues be resolved when this vast pool of older workers finally retires?
“Hard to say,” says Bianchi. “It’s complicated.” First, with life expectancy increasing, it is natural for older workers to stay in their jobs longer, whether they want to or need to. And in most high-income economies, public pension funds are not sustainable unless workers stay in work longer.
But even if we see a big wave of retirements, Bianchi believes that congestion may continue.
That’s because the issues are not just about demographics but also about macroeconomic trends, such as the prevalence of mature companies with little room to add more senior positions.
This means fewer highly ranked posts for the foreseeable future. And while having older workers is a good thing for many companies—they offer a wealth of experience and are valuable members of the company—it can lead to cultures and processes that alienate younger workers.
And, in the long run, failing to attract (and develop) younger workers is also bad for employers, Bianchi believes. Besides, businesses can benefit from the fresh perspectives and willingness of younger workers to learn new skills. One possible solution is to give businesses subsidies to hire younger workers — an issue Bianchi is now studying — but, he says, “there’s no easy solution to this problem.”
