Vintage Effects In Human Capital: Europe Versus The United States

• Published date: 01 March 2020
• Author: Robert Inklaar,Marianna Papakonstantinou
• Date: 01 March 2020
• DOI: http://doi.org/10.1111/roiw.12382

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© 2018 The Authors. Review of I ncome and Wealth publi shed by John Wiley & Sons Lt d on behalf

of Internat ional Associat ion for Research in In come and Wealth

This is an open access article under the terms of the Creative Commons Attribution License, which

permits use, distribution and reproduction in any medium, provided the original work is properly cited.

VINTAGE EFFECTS IN HUMAN CAPITAL: EUROPE VERSUS THE

UNITED STATES

by RobeRt InklaaR* and MaRIanna PaPakonstantInou

Groningen G rowth and Developme nt Centre, University of G roningen

The standard assumption in growth accounting is that an hour worked by a worker of given type deliv-

ers a constant quantity of labor services over time. This assumption may be violated due to vintage

effects, which were shown to be important in the United States since the early 1980s, leading to an

underestimation of the growth of labor input (Bowlus and Robinson, 2012). We apply their method for

identifying vintage effects to a comparison between the United States and six European countries. We

find that vintage effects led to increases of labor services per hour worked by high-skilled workers in the

United States and United Kingdom and decreases in Continental European countries between 1995

and 2005. Rather than a productivity growth advantage of the US and UK, the primary difference with

Continental European countries was human capital vintage effects instead.

JEL Codes: O11, J31, E24

Keywords: human capital, productivity, vintage effects

1. IntRoductIon

Improvements in human capital have long been thought to contribute only

modestly to economic growth, following the growth accounting method of

Jorgenson and Griliches (1967).1 For example, Jorgenson et al. (2016, Table 4)

show that the United States economy grew at an average annual rate of 3.23 per-

cent between 1947 and 2010 and that human capital improvements only contrib-

uted 0.24 percentage points to this total, with little variation in this contribution

over time.2 Growth accounting relies on the assumption that an hour worked by a

person of given type—distinguished by education, age and gender—provides a

constant quantity of labor services over time. Yet this assumption is increasingly

challenged on both theoretical and empirical grounds as the quality of education

and post-education accumulation of human capital may change over time; see

1See Hulten (2010) for a more recent survey.

2Jones (2016, p. 11) shows very similar estimates.

*We would like to thank an anonymous referee, Raquel Ortega-Argilés, Marcel Timmer, the editor

and seminar participants at the University of Groningen (2016) for helpful comments and

suggestions.

Correspondence to: Robert Inklaar, Faculty of Economics and Business, Department of Global

Economics and Management, University of Groningen, PO Box 800, 9700 AV, Groningen, The

Netherlands (r.c.inklaar@rug.nl).

Review of Inc ome and Wealth

Series 66 , Number 1, March 2020

DOI : 10.1111 /roi w.123 82

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Review of Income and Wealth, Series 66, Number 1, March 2020

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© 2018 The Authors. Review of I ncome and Wealth publi shed by John Wiley & Sons Lt d on behalf

of Internat ional Associat ion for Research in In come and Wealth

Lucas (2015). Bowlus and Robinson (2012) contribute to this literature by modify-

ing the growth accounting method to accommodate vintage effects, whereby new

graduates may differ from previous cohorts in terms of the quantity of labor ser-

vices per hour worked that they supply, for instance due to improved schooling or

on-the-job training.3 Applying their method to data for the United States between

1963 and 2008, they find that the quantity of labor services per hour worked by

college-educated workers increased substantially. As a consequence, they argue

that there is a larger role for human capital in accounting for US growth than based

on the traditional ‘constant quantity’ assumption.

An important question is whether the Bowlus and Robinson (2012) results can

be generalized to a broader set of countries. A comparison with European countries

is especially interesting as productivity growth in the US accelerated in the mid-1990s,

while European productivity lagged behind. Standard growth accounting shows no

important role for differences in human capital improvements in accounting for

these differences (Timmer et al., 2013), but if vintage effects led to higher growth

of (effective) labor input in the US but not in Europe, that could provide a more

focused target for analysis and economic policy. To address this question, we apply

the Bowlus and Robinson (2012) method to a more recent period for the US, cover-

ing the 1975–2014 period (using data from the Current Population Survey, CPS) and

to six European countries – France, Germany, Italy, the Netherlands, Spain and the

United Kingdom—covering the period from the mid-1990s to 2013 (with coverage

varying by country) using the Luxembourg Income Study (LIS) database.

In standard growth accounting, the quantity of labor services provided by a

given type of worker is assumed to be constant over time. Observing an increase

in workers’ wages then implies that the price of that type of human capital—the

price per unit of labor services—has increased. The novelty of the Bowlus and

Robinson (2012) method is that it drops the assumption that an hour worked by a

worker of a given skill level delivers a constant amount of labor services over time

and thus that increases in wages are increases in the price of human capital. The

method does so by drawing on the literature on life-cycle earnings (Ben-Porath,

1967) and earlier work by Heckman et al. (1998). The key assumption of Bowlus

and Robinson (2012) is that changes in the price of human capital (at a particular

educational level) can be identified only for workers at a late stage in their life cycle,

at a point where these older workers no longer increase their productivity. Put dif-

ferently, there is a period in a worker’s life cycle during which worker productivity

is constant, a so-called flat spot range.

This point is illustrated in Figure 1, which shows a smoothed curve of (the log

of) the median hourly wage of high-skilled workers in the US in 1995 and 2005.

We draw two important observations from this figure. First, wages increase rapidly

with age, but after the age of 50 there is no clear trend. This observation, analyzed

more extensively in Bowlus and Robinson (2012), is at the heart of the empirical

argument for a flat spot range in human capital accumulation: after a certain age, a

typical worker’s wage no longer increases, indicating their human capital no longer

increases. The second observation is that the age-wage profile can change its shape

over time: the 2005 profile is higher than the 1995 at all points, but substantially

3We use the term “vintage effects” throughout, but the literature also refers to these as “cohort

effects”.