The Evolution of Income Differences over the Life Cycle

Workers typically increase their incomes as they progress in their careers. But do differences between the highest earners and the lowest earnings grow or diminish over their life cycle? It turns out that the answer depends on which group of individuals you study.

In this blog post, I examine the evolution of income differences by comparing workers early in their careers and later in their careers. The labor income data comes from the Current Population Survey’s yearly March Supplement. My sample includes data from 1962 onward and covers people who were born before 2001.

In my analysis, I adjust incomes for inflation and then look at workers between ages 25 and 29 and workers between 55 and 59 who are all born in a particular year.I group workers into five-year age bins to increase sample size, as conditioning on a specific birth year and age leads to fewer observations and thus greater sensitivity to noise and outliers. For example, the 1960 birth year would compare 25- to 29-year-olds with 55- to 59-year-olds who were all born in 1960.

For each of the two age groups, I measure the income differences via the ratio of the 90th percentile (those making more than 90% of workers) to the 10th percentile (those making less than 90% of workers). This income ratio captures how much higher incomes are at the top of income distribution compared with those at the bottom.

A First Look: Income Differences by Age

I start by looking at the aggregate picture. For each birth cohort, I plotted the income ratio at ages 25 to 29, in the solid blue line, and again at ages 55 to 59, in the solid gold line. 1970 and 2000 are the last birth years for the 55-59 group and the 25-29 group, respectively; these are the years with data for the youngest member of each cohort.

First, note that for the overall population, income differences are consistently higher later in the career. For every cohort, the income ratio between the 90th (highest income) and 10th (lowest income) percentiles at ages 55 to 59 sits well above the corresponding value at ages 25 to 29. Early on, workers in the 90th percentile are making around six times as much as those in the 10th percentile. These differences become more pronounced at the older age, when the workers in the 90th percentile make between seven and nine times more than those in the 10th. These patterns reflect the familiar idea that the income distribution widens over the life cycle, as earnings differences accumulate through job mobility, promotions and differential growth in skills.

Another clear pattern is that the income ratio at ages 55 to 59 shows a pronounced decline as the birth year increases. This means that the rise in income differences over the life cycle has become much less pronounced for individuals born more recently. What accounts for this flattening? As we will see, breaking down the data by demographic groups reveals very different patterns across the population, offering clues about the compositional changes and economic forces underlying this trend.

Disaggregating by Education and Sex

The next four figures break down these patterns by education and gender, separating the population into four groups: men without a college degree, men with at least a college degree, women without a college degree, and women with at least a college degree. As you read on, it is worth keeping in the back of your mind that the population shares of these groups have shifted over time, as college attainment grew and women increasingly entered the labor force.

Life-Cycle Profile of Men without a College Degree

Among men without a college degree, the life-cycle profile in income differences has flattened sharply for later cohorts (those born later); this can be seen by the convergence of the solid gold and blue lines. This flattening is driven both by an increase in differences early on and by a decrease in differences in late careers. In other words, for those born later, much of the widening income distribution that once emerged gradually over the life cycle is already present early on, leaving far less scope for additional divergence with age. We also see that the rise in early-career differences continues for more recent cohorts that have not yet reached ages 55 to 59. Because men lacking a college degree make up a large share of the labor force, particularly among earlier cohorts, they likely account for much of the aggregate patterns for early cohorts seen in the previous figure.

Life-Cycle Profile of Men with a College Degree

Men with a college degree exhibit similar patterns to men without a degree, except that the life-cycle profile has not totally flattened in later cohorts. Like their counterparts without degrees, initial levels of income differences have been increasing among later cohorts, but late-career differences have remained relatively stable.

Life-Cycle Profile of Women without a College Degree

Women without a college degree display a markedly different pattern. For this group, the income ratio is relatively flat, and in some cases even declining, over the life cycle, with differences at ages 55 to 59 often below those observed at ages 25 to 29. In addition, the overall level of life-cycle income differences for women without a degree has fallen across cohorts. One factor to keep in mind is selection: Women without a degree may be especially selected at older ages because eventually many women temporarily or permanently exit the labor force. As a result, those who remain employed at ages 55 to 59 may represent a more homogeneous group than those observed at ages 25 to 29.

Life-Cycle Profile of Women with a College Degree

Women with at least a college degree, for the most part, continue to display the familiar widening of income distribution over the life cycle, with the income ratio at ages 55 to 59 generally exceeding that at ages 25 to 29. Estimates for the earliest cohorts (those born earlier) are noisier, reflecting the small number of college-educated women in those cohorts. Over time, however, the pattern becomes more stable. It is also worth noting that this group experienced the largest increase in its share of the labor force over time, which may be relevant for interpreting the aggregate trends.

Income Differences Still Grow with Age but Now Less Sharply

These figures reveal substantial heterogeneity in life-cycle income differences across cohorts, education and sex. Depending on the group, differences in income may rise, flatten or decline over the life cycle. This helps explain why aggregate differences still increase with age but far less sharply than in the past, as differences in incomes have become more front-loaded earlier in the career.

Part of this pattern may reflect compositional changes in the labor force. Among men, there is clear evidence of a flattening in life-cycle profiles of income differences. At the same time, these groups have over time experienced rising differences early in the career, a trend that is muted in the aggregate. One reason is that there is an opposing force: Women, particularly those with a college degree, have grown to account for a larger share of the labor force and have tended to exhibit stable or declining levels of early-career differences over time.

Whether this flattening persists for newer cohorts, and why these patterns have changed within groups—whether the result of shifts in selection into employment or education, or other changes in the structure of income—remains an open and important question for future research.

Note

1. I group workers into five-year age bins to increase sample size, as conditioning on a specific birth year and age leads to fewer observations and thus greater sensitivity to noise and outliers.