Academic journal article Journal of Forensic Economics

Age-Earnings Profiles Estimates: Do They Change over Time?

Academic journal article Journal of Forensic Economics

Age-Earnings Profiles Estimates: Do They Change over Time?

Article excerpt

There has been significant research by forensic economists investigating the role of age-earnings factors when forecasting economic loss in injury and death cases. See, for example, Gilbert (1994), Lane and Glennon (1985 and 1988), Brookshire and Mathis (1993), and Gohmann (1992). Conceptually, age-earnings adjustments are made when it is important to determine the impact of age on earnings arising from such personal productivity growth factors as promotions, job advancements, on-the-job training and similar changes up the occupational ladder. Such factors occur in addition to general wage increases over time.

In the experience of the authors, the method utilized by many forensic economists with regards to age-earnings factors is roughly as follows. The economist first makes a determination whether age-earnings adjustments are appropriate. An obvious candidate would be a minor with no work experience. If age-earning factors are incorporated, the economist chooses an age-earnings data set. Forensic economists often use P-60 publications from the Department of Commerce. The data are used as a basis for estimating future age-earnings adjustments. The researcher may leave the data in interval form so the same adjustment is made for five or ten-year periods, or the data can be smoothed applying a log-linear regression model. In either case, the resulting information is then combined with other factors such as starting (base) wages, general wage increases over time, and discount rates to determine the present value of future loss.

One of the difficulties with the above approach is that even though forensic economists will usually employ the most recent age-earnings data, there is no assurance that the particular shape of the age-earnings curve for the demographic cohort analyzed will be a good representation of a worker's true profile since the cross sectional data give earnings information for different cohorts of individuals at a point in time. This snapshot of earnings at a point in time produces potential problems for the forensic economist who wishes to estimate an individual's age-earnings profile over time.

One problem is that the cross-sectional data compares individuals in different cohorts at different ages. It is unlikely that a 20-year-old female today will in 30 years have the same labor market experience and wages as a 50-year-old woman today. A second issue is that different age cohorts vary in size. For example, the baby bust generation will have significantly fewer individuals in the labor force compared to the baby boom generation preceding them. This will influence the relative wages between age groups over time. Clearly, relative numbers of workers at different age groups influence relative wage rates. Also, if the returns to education change over time due to changes in technology and changes in the industrial structure, the estimated age-earnings profiles may change in a systematic way.

These problems with cross-sectional data will be important only if they result in significant changes in the age-earnings profiles that are predicted. If the profiles do not change much over time, then use of the cross-sectional data is warranted and the forensic economist can have more confidence using cross-sectional data. On the other hand, if the profiles change significantly over time, then the forensic economist needs to be aware of how the profiles change over time and take into account any systematic changes that occur. The use of cross sectional data can lead to biased estimates of future earnings and improper awards. Information about systematic changes in profiles by education levels allows the forensic economist to argue how the future profile may differ from his predicted profile and thus he can give a better estimate of how future earnings will grow. Our results are a first step in the process.

In the first section of this paper, there is a summary of the age-earnings literature as found in forensic economics journals. …

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