Applying a CRESH aggregate labour index to generate age-wage profiles

Abstract

This article shows how a CRESH (Constant Ratios of Elasticity of Substitution, Homothetic) labour index can generate more realistic optimal wage profiles than traditional (restrictive) functional forms. The CRESH index function allows for age-specific elasticities of substitution that are implied by a proper choice of CRESH parameters. The ability to generate plausible optimal age-wage profiles can be useful in, for example, calibrating demographic macroeconomic models. The CRESH analysis also provides one explanation for the well-established divergence of actual relative wages by age from the relative age-specific intensity parameters of a simple additive labour index. Moreover, CRESH labour index may explain the increasing relative wages for middle-aged workers as a result of employing larger numbers of older workers (population aging).

Keywords:

• Labour substitution
• age-wage profiles
• CRESH function
• wage premium

JEL Classification:

• D00
• J10

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Corrigendum

Notes

¹ Constant Ratio of Elasticities Homothetic (Hanoch 1971).

² Note that in cases where , and hence.

³ An assumption was required for labour aged over 65 years because the ILO data provide a single participation rate for the over-65 population. It was assumed that this rate applied to the population aged 65–69 and that the participation rate for the population aged over 69 was zero.