Average weekly earnings of all males
Constant 78.781 (5.99**) Experience 3.4714 (4.47**) Experience 2 -0.0593 (-5.99**)
Unemployment rate of age category -0.747
(-5.11**)
Cohort 0.046
(0.44)
Experience * cohort -0.0085
(-1.81)
Graduates as proportion of age category 1.045
(3.97**)
Post secondary as proportion of age category -0.229
(-1.27)
SEE 1.59
R 2 0.98
F 234.16**
F test of joint significance of cohort and
experience *cohort 2.51
Number of observations 50
Reset Test 2
predicted Y 2 (t value) -0.5
Reset Test 3
F test of joint significance of Y 2 and Y 3 11.29**
Notes: t statistics are in brackets. Test statistics are marked * for those significant at the five per cent level and ** for those significant at the one per cent level.
for the unemployment rate. We have not tested this second proposition.1(8)
In summary, there are a number of studies for Great Britain and the United States
using pooled cross section and time series data which find a negative effect of large
1 2 0
2. The Effect of Cohort Size on Earnings- Cross Section Evidence.
The studies we have summarised above all use time series data to estimate cohort
effects on earnings. In this section, we shall ask the following question; can cohort
effects explain the shape of the age earnings profiles observed in the cross section of
each of the three countries ?
As we have already discussed, our ability to detect cohort effects on earnings in the
cross section is limited by our lack of a counterfactual hypothesis and also by the
position of the large cohort in the cross section. In 1981, the largest cohorts in each of our samples had completed their initial years in the work force and this suggests the
following test of the effect of cohort size on earnings. If large cohort size affects only the
earnings of the large cohort and not the earnings of other age groups, then we should
observe in the cross section a profile as depicted in stylised form in figure 5.1 by the heavy line. The reduction in earnings for the cohort group will be more pronounced if
Berger’s assumption of a persisting cohort effect is correct and smaller if Welch was
correct in suggesting that large cohorts recover from the initial adverse effect on their
earnings. If however, the large cohorts have become substitutes for all other workers
regardless o f age, and with a given demand for labour, the increased supply of workers
has reduced the earnings of all workers, we will not observe a cohort effect on the
earnings of the large cohort alone. The earnings profile in the worker phase of the career
phase model will be flatter for all members of this group, not just for the large cohort.
This is illustrated in figure 5.2. (9)
The proposition that cohort size effects earnings can be interpreted in several ways,
as we have seen in earlier studies, and two of these will be considered here. It can be a
purely demographic variable and measure the size of the birth cohort or it can be related
to education group. The latter will be important if individuals with different levels of
E a rn in g s
121
Figure 5.1: The Effect of Cohort Size in a Cross Section.
- Ordinary Cohort Welch large Cohort
• Berger large Cohort
Experience
Figure 5.2: The Effect of a Large Cohort on the Earnings of "Workers"
Earnings in the absence of a large cohort
Earnings in the presence of a large cohort
Workers Learners
Experience
1 2 2
will be related to the number of other men of his age with his level of education rather
than the number of all men his age.
Ermish (1988a) and Wright (1989) in their two British studies opt for a
demographic definition of cohort on the basis that this is clearly an exogenous variable in
an earnings function. Current earnings will not influence the number who were bom at
least 16 years earlier. Educational cohorts are more likely to be influenced by the current
level of earnings. Current earnings of particular education groups influence schooling
decisions of those currently choosing between the labour market and various types of
education.(10) it is iess d e ar how the causal link may run in general. It would be
necessary to argue that current earnings have influenced the educational decisions of
members of the sample in the past. As we are interested in both hypotheses that the size
of the birth cohort in the labour force and the size of the education cohort affect earnings,
we shall report results using both definitions.
Cohort size has been measured as a five year moving average of those of a given
age plus and minus two years
Ai-2 + A i-i + Ai + A i+i +Ai+2 C i= _________________________
5
where Ai is the proportion of men in the labour force aged 16-64 who were of age i.
Cohort size was also calculated in the same way for each of the four education groups.
In this case, Ai was the proportion of men aged 16-64 with a given level of education of
age i.
A description of the educational cohort variables is presented in Appendix E. Here
we shall only consider the distribution by age of all men who were in the workforce aged
16-64 for each of the countries. The data are presented in Figure 5.3. The range of
cohort size was largest in the US, from 0.05 per cent at age 16 to 3.1 per cent at ages 31
and 32, and smallest in Great Britain where the range was from 1.4 per cent at age 64 to
1 2 3
2.9 per cent at age 32. In each country, the largest cohorts were under the age of 35.
There was a particularly sharp concentration of men in the US aged between about 26
and 36. In Australia and Great Britain, young men between the ages of 18 and 22
constituted a much larger percentage of the workforce than this age group in the US.
Where each cohort in this age range accounted for between 2.5 and 3 per cent of the
workforce in Australia and over 2 per cent of the workforce in Great Britain, they
accounted for between 0.5 per cent and 1.75 per cent of the male workforce in the US.
In Great Britain, there was a relatively large proportion of the sample who were over 56
compared with the other countries.
Table 5.2 presents regression results using a broad definition of cohort size based
on membership to the workforce. Most of the coefficients are similar to those already
reported in earlier chapters so we shall concentrate on the results for cohort size. In
Australia and Great Britain, the cohort variable was not significant at the five per cent
level. It was not possible to pick up any effect of cohort size, defined in this general way
to cover the effect of generation size, on earnings using cross section data.
Figure 5.3: Percentage of Each Sample of Men by Age, Australia, GB, US, 1 9 8 1 . 4 T % 2 3 . 5 • 2. 5 0. 5 1. 5 3 1