A person’s earnings will tend to increase as they age…to a certain point.  After that point, which is around age 46 or so depending on the person’s education level and occupation, the person’s earnings will tend to decrease as the age.

The age-earnings profile captures this phenomenon. The age-earnings profile is calculated from data sources like the Current Population Survey from the U.S. BLS

Here is a question that we recently addressed:

Q: Any idea on how to create an age-earnings profile for someone specifically with an MBA?  Are there data somewhere that have created such a profile?  I can see using the ACS (American Community Survey) to look at people by age who have a master’s degree and are employed in management occupations.  Anything more specific? 

A: The ACS would be a good start and would allow you to estimate an age-earnings profile more specific to the facts in your case.  In our cases we generally estimate the age earnings profiling using a regression model.  In our cases, there are generally not enough observations to filter for all the specific facts that we want to account for so a regression approach has been useful for us.

Standard age earnings profile regressions from labor economics models, see for example papers by  Mincer et al., Lazear et al, ,  Welch et al. and many more,  regress earnings on experience, experience squared, occupation variables, geographical variables, and education variables. 

 

 

The graph above shows the expected lifetime earnings of a person working as a manufacturing assembler.  The red line shows the earnings that a person who began working as a manufacturing assembler in 2006 could expect over their projected work life of approximately 44 years.   The blue line shows the earnings that a person who began working as a manufacturing assembler in 2010 could expect over a projected work life of approximately 44 years.  Both projected earnings streams account for projected inflation.

The work life earnings for manufacturing assemblers, projected using a life cycle labor market model, show that after the Great Recession these types of workers can expect both lower annual earnings and wage increases over their projected working life.

Methodology:

The projected earnings profiles are constructed from statistical models based on the Current Population Survey (CPS) labor market data from the U.S. Bureau of Labor Statistics (BLS).  The earnings profiles for assembly workers are based on the earnings of high school educated white male assemblers and fabricators, working full-time or part-time, in 2006 and 2010.

A new study by Pew Research suggest that young women are ‘leaning in’ more and more as earnings and education attainment level increase for women. A study by the Pew Research center shows that for younger women, the so called Millennial generation, the unadjusted gap between what women an men earn is significantly smaller than women from other generations.  The survey, which is based on U.S. Census data, finds that:

this group of young women are the first in modern history to start their work lives at near parity with men. In 2012,

The study found that among workers ages 25 to 34, women’s unadjusted hourly earnings were 93% those of men.  By comparison, for all working men and women ages 16 and older, the study found that women’s hourly wages were 84% those of men.

The study does not adjust for factors such as the type of job.  Accounting  for these types of employment factors would likely decrease the earnings gap even further.

The study also found that women in the Millennial generation outpaced men in terms of educational attainment. The graph below shows the % of men and women enrolled in college and those earning Bachelors’ degrees.

Upward mobility, or the ability to move out of a lower income situation into the middle or top income class is a hot top in the U.S.  According to the New York Times, both political parties have argued recently that the odds of climbing the income ladder are lower today than in previous decades.

Drake, a popular rapper and hip hop artist, has a song, ‘Started from the Bottom’ , that (at least in spirit) embodies this debate.  His song, like the song’s title suggests, describes how he started at the bottom of the music industry and rose to the top over time.

A new study from the Equality of Opportunity Project finds that upward mobility has in fact not declined from previous decades like politicians suggest.  However, their study suggests that upward income mobility, unlike the experience of Drake, is difficulty for the average U.S. worker.  Overall, the author’s find that “…the [income] rungs of the [income] ladder have grown further apart (income inequality has increased), but children’s chances of climbing from lower to higher [income] rungs have not changed .”

The study’s authors, Raj Chetty, Nathaniel Hendren, Patrick Kline, Emmanuel Saez, and Nicholas Turner,  find that  contrary to popular perception, income mobility across generations have remained extremely stable for children born in the 1971-1993 time period.  For example, the authors find the probability that a child reaches the top fifth of the income distribution given that their parents were in the bottom fifth of the income distribution is 8.4% for children born in 1971, compared with 9.0% for those born in 1986.

Their study, which is one of the largest in the nation, does however find that upward mobility in the U.S. is difficulty.  They find that upward mobility depends on a number of factors, such as geographical location, parent’s education, and family demographics.

For instance, the author’s study found that a person born into a San Jose, CA family that has income in the bottom 1/5 of workers  is 3x more likely than the same person born in Charlotte, NC to reach the top 1/5 of the income  distribution.

In short, the author’s study suggest that likelihood that the average person will rise from the bottom to the top, like the rapper Drake, may in fact be relatively small.

Side note: The project’s interactive data visualization tool is simply amazing. It allows you to see the impact of location on upward mobility probabilities by clicking on a map.

What is it?: Phantom stock is a form of compensation where a company promises to pay cash at some future date, in an amount equal to the market value of a number of shares of its stock.  The recipent does not receive actual stock.

How does it work?  The payout on Phantom Stock will increase if the stock price rises, and decrease if the stock falls, but without the recipient actually receiving any stock. Like other forms of stock-based compensation plans, phantom stock broadly serves to encourage employee retention, and to align the interests of recipients and shareholders.

Phantom stock is essentially a cash bonus plan, although some plans pay out the benefits in the form of shares. Phantom stock is favored by closely held or family-owned companies who want to provide incentives to management and other employees without granting them equity.

How is it taxed?  When the payout is made, it is taxed as ordinary income to the employee and is deductible to the employer. Generally, phantom plans require the employee to become vested, either through seniority or meeting a performance target.

Sources: 

The National Center of Employee Ownership, http://www.nceo.org/articles/phantom-stock-appreciation-rights-sars)

http://en.wikipedia.org/wiki/Phantom_stock

Pictures and images: http://slgsecurities.files.wordpress.com/2012/09/incentive-phantom-stock-michae_10762769.jpg

 

Source: U.S. Department of Commerce, Economics and Statistics Adminstration

U.S.  Department of Commerce reports manufacturing wages and employment continues to rise the U.S. The new study uses a relatively new data source, the Quarterly Workforce Indicators (QWI), to analyze the earnings of new hires relative to incumbent workers in both manufacturing and non-manufacturing.

They find that new hires in the manufacturing sector earn more than new hires in other industries and have done particularly well since the recession began.

Highlight from the study include:

• New hires in manufacturing enjoy an earnings premium relative to other new hires.  T
• At the end of 2011, the ratio of new hire earnings to incumbent earnings was about 8 percentage points higher in manufacturing than in other industries.
• Over time, the earnings of new hires relative to incumbents have been consistently higher in manufacturing.
• Since the recession began, real average earnings for new hires in manufacturing grew 3.5 percent, while earnings of incumbents in manufacturing grew about 2.4 percent.

In earnings losses analyses which is relevant: total earnings or total taxable earnings?

A: Total earnings. Taxes and tax laws are subject to change. Additionally, fringe benefit values, such as those obtained from US BLS are based on earnings not taxable income.

Bottom line: tax treatments generally need to be backed out of income numbers when analyzing earnings losses.