Blame the baby boomers for depressed wage growth

• ? While ‘blame’ may sound harsh, the reality is that in an ageing society, the over‐60s accounting for a bigger share of the workforce equals lower wage growth. This is particularly pertinent for the eurozone right now with the baby boomer generation entering the last phase of their working life. Our analysis shows that the very sizeable over‐60 cohort is depressing aggregate wage growth by up to 0.3 ppts annually. That may also help explain why inflation is still subdued .
• ? European policy makers are scratching their heads about why wage growth has not picked up in line with economic growth over the past two years. For the ECB this is relevant as it tries to understand why inflation remains low. While much of the debate centres around unemployment and the Phillips curve, this article looks at the impact of an ageing society on wage growth.
• ? Even though this is more of a structural, rather than a cyclical, perspective, it is particularly important for the eurozone economies right now, because the large post‐World War II baby boomer generation is strongly pushing up the elderly share of employment (measured as those aged 60 and above). As the share of the over 60s in total employment grows, so does their weight in aggregate wage growth.
• ? The crucial point is that wages increase with age, but at a decreasing rate, and stay essentially flat above 55. The main reasons are that the elderly invest much less in continued education and are less inclined to switch to better‐paying jobs.
• ? Our analysis shows how substantial the negative impact of an ageing workforce is on wage growth in the eurozone. By simulating an alternative demographic scenario, we estimate that wage growth in 2015–17 would have been 0.3 ppts per year higher had it not been for the ageing baby‐boomers. Similarly, forecasts for 2018–20 not accounting for the baby‐boomers may overstate wage growth by some 0.2 ppts or more annually.