for michael smith

ECO490

Danni Song

Dr. Nancy

How do Age Influence Income?

Introduction

As people age their level of income might be expected to increase or remain at the same level until retirement. As individual ages, their working energy decrease leading to a decrease in their level of income. However, they gain more job experience as compared with employees who have worked for few years. The relationship between age and income explains why experienced workers have difficult time trying to adjust to job loss because their earnings reflect special skills required in the industry. The aim of this study is to find out if there exist any premiums to compensate for the job experience acquired after many years of work. The population data will be collected from a sample divided into age groups, the first group will comprise of workers aged between 15 to 39 years and the second group will be made up of individuals aged between 40 to 69. The data will be analyzed using a regression model to find out if there is any linear relationship between age and income. Finally the papers will use the statistical results to explain the relationship between the variables.

Literature review

Age-earning relationship is used to explain income growth in an employment life cycle. Many studies have been done in the past. According to Cloninger (2016), it is important to understand the factors that bring income inequality in our society. He argues that understanding the causes of income inequality can assist in reducing the gap. However, he states that age is a natural cause of income disparity and it can’t be easily affected by government policies. According to Bares (2016), increase in age leads to increase in income up to the age of 55 years and after this age the level of income begin to decline. Bares (2016) explained from a research carried out between 2000 and 2009 by collecting data from individuals from different age groups. As an individual goes up through the employment ladder they gain more experience and become more resourceful to the organization they are working with.

A research conducted by Towers Perrin found out that as employees become old, the organization views them as more expensive and less productive as compared to young workers according to Bares (2016). The study explains only increase in salary due to works experience and also reduction in earnings for old people because they become less productive to the company. The aim of this study is to found out if there exists any linear relationship between the variables, an existing relationship between the variables is important in decision making.

There are different explanations of the relationship between age and income; they include human capital theory, aging labor markets and organizational dynamics. Income rises as a worker ages and goes up the ladder until mid-50s when he or she reaches the peak of his or her earning and then the level of earnings start to decrease. The decrease in income from mid 50s is attributed to decrease in productivity due to advancement in age. Parramore (2016) explains that workers over 50 years are perceived to have less energy and this lead to decrease in income as a worker gets closer to retirement. This shows that age affects individual income in the labor markets and there should be a special relationship between the variables. This study will expound on the past studies by developing a regression analysis to explain the relationship between age and income.

Model

A model is a simplified reality description; an economic model is designed to yield hypotheses about a testable economic behavior .A model represents an economic process by use of quantitative relationship between the variables (Howitt, 2014). In this study a regression model will be used to represent the relationship between the independent and the dependent variable. The regression model is made up of one dependent variable, one independent variable and four control variables.

Control variables in the equation include white, black, Asian, age15_39, age 40_69. The econometric model will be represented as follows; (