Age and Productivity Potential: A New Approach Based on Ability Levels and Industry-Wide Task Demand

I propose a framework to estimate the relation between age and productivity potential (a work performance measurement based on cognitive and non-cognitive skills and the labor market importance of these skills). This is done to show that the age–productivity curve is not necessarily static but can vary with changing labor market requirements. By basing the analysis on age variation in individuals’ abilities and the changing importance of these abilities in the labor market, focus is given to the causes of age differences in productivity. Using a dynamic causal approach, I focus on issues that have been neglected in earlier investigations. Earlier studies have seldom investigated why productivity varies by age. Nor have they considered that the shape of the age–productivity profile can change over time. Previous research has failed to develop a general model of the interrelationship of age and productivity. Conclusions on age-performance variation based on piece-rate samples or supervisors’ ratings can be biased, as they tend to come from a very limited set of occupations. Analyses of employer–employee datasets are also usually restricted in terms of industries (for example, they often do not consider service industries). The investigation overcomes some of these shortcomings by focusing on the potential causes of age differences in productivity. I estimate how the determinants of productivity vary by age and the relative importance of these determinants in the labor market, using ability tests and estimates of the relative importance of the abilities in the labor market. These estimates suggest that job performance follows an inverted U-shaped curve, increasing in the initial labor market years and decreasing toward the end of one’s career. The shape and peak of the curve varies over time according to changes in the labor market demand for abilities. Given that experience has a reasonably strong effect on productivity, the peak productivity potential occurs in ages 35–44 years.