The age pay gap and labor market heterogeneity: A new empirical approach using data for Italy

Using Italian microdata over the period 2005-2016, this paper studies the difference in pay between elderly (55-64) and adult (34-54) workers in Italy along the wage distribution. The estimation strategy consists in using a three-way fixed effects wage model and adjusting the wage gap for (observed and unobserved) labor market heterogeneity. The estimation relies on OLS as well as on unconditional quantile regressions. The analysis beyond the mean shows substantial differences in the age pay gap along the wage distribution and finds particularly pronounced gaps at the top. The fixed effects of interest (individual, job and industry) are estimated via a partitioned procedure. Adjusting the gap for labor market heterogeneity reduces the gap almost to zero. The results suggest that individual differences between the cohorts both observed and unobserved are the main driver of the gap.