The effect of aging on the age–wage profile in Japan

Abstract

This paper argues that aging of the workforce is an important factor causing the flattening of the age–wage profile of the Japanese economy that has been observed over the past two decades. Assuming imperfect substitution between older and younger workers, we derive the labor demand function from the firm’s optimization problem. We estimate the elasticity of substitution between different aged workers, and quantify the effect of aging on the age–wage profile. We find that aging of the workforce can explain more than 80% of the change in the age–wage profile from 2000 to 2019.