This paper is an empirical investigation into wage (i.e. hourly compensation of labor), hours (i.e. hours of market work), and earnings (i.e. the product of wage and hours) profiles over the entire life cycle, from the vantage point of panel data. To date, no empirical study has simultaneously considered these three variables within the same framework using individual level, longitudinal data covering the entire working life. In contrast, the theoretical literature is much more mature.
Consensus is well-established around two different theories. First, the human capital model. This framework is still the workhorse in macro-labor, and makes sharp predictions on the shape of wage, hours, and earnings profiles over the life cycle. A common view in the literature on human capital acquisition and its returns is that these profiles are all “hump shaped.” The human capital model initiated by Ben-Porath (1967) and developed by Ghez and Becker (1975), Blinder and Weiss (1976), Ryder, Stafford, and Stephan (1976), Heckman (1976), and Rosen (1976) posits that the wage rate is the unit return on the individual stock of human capital.
The wage rate initially grows because investment increases the stock of skills. As the end of working life approaches, investment in human capital optimally falls below depreciation and the wage rate declines, tracing out a hump-shaped profile that reflects the dynamics of individual productivity. Hours and earnings, then, are also hump shaped.
