where a is the percentage change in the age earnings profile in year t from year t-1 and s is the percentage change or percentage shift, in level or shape, of the age earnings profile in year t from year t-1.
It is assumed that the combination of these effects results in a concave age earnings profile and, empirically, there is substantial evidence supporting the concavity of age-earnings profiles (Gilbert, 1994).
Now consider the error in the estimation of the present value of future losses due to the use of the hypothetical net discount rate, which implicitly assumes a linear age earnings profile. Suppose we need to calculate the economic losses of a male with a bachelor's degree whose remaining worklife is from age 30 through age 62 implying a net discount rate of 2.52%.
This suggest that the accumulation of skills continues till age 25 and only after age 25 they receive substantial returns of education and other skills which increases the slope of the age earnings profile. As postulated earlier, the returns differ for different educational achievements.
The age earnings profiles based on the estimates of earnings functions indicate that earnings are increasing functions of education and one of the main causes of inequality in the personal earnings.
It is interesting to note that although there are significant differences in compensation for workers across the employer size, yet the age earnings profiles
follow the life-cycle pattern in both categories where income increases with age for some time, reaches at the peak and then declines.
Estimating the earnings equation by gender will allow for gender differences in age earnings profiles
To get an indication of how much the age earnings profiles changed between 1979 and 1989, we predict earnings for each education, year and sex group for each year of age from age 20 to age 70.
A simple comparison of how the age earnings profiles have changed can be seen by examining the sum of earnings from age 20 to age 70.
Moreover, the age earnings profiles
for different education groups follow the usual concave shape, showing a decline in earnings after the prime earnings age.