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Life-cycle variations in the association between current and lifetime earnings: Evidence for German natives and guest workers

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  • Brenner, Jan

Abstract

In many economic models a central variable of interest is lifetime or permanent income which is not observed in survey data sets and typically proxied by annual income information. To assess the quality of such approximations, we use a unique source of lifetime earnings -- the German pension system -- and focus on two important issues that have been largely ignored in the existing literature. The first is how to deal with zero income observations in the analysis of women. The second is whether these approximations differ between natives and guest workers. For female earners, we find that estimates of the associations between current and lifetime income are highly sensitive to the treatment of zero earnings. The reason turns out to be the highly cyclical nature of the labor supply behavior of mothers. Furthermore, immigrants' income proxies are prone to significantly larger attenuation biases over the entire life-cycle. This result is explained by the larger share of annual income variance attributable to the transitory income component for immigrants. Averaging income over up to 15Â years alleviates the attenuation bias as well as the difference in biases between natives and guest workers.

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Bibliographic Info

Article provided by Elsevier in its journal Labour Economics.

Volume (Year): 17 (2010)
Issue (Month): 2 (April)
Pages: 392-406

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Handle: RePEc:eee:labeco:v:17:y:2010:i:2:p:392-406

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Web page: http://www.elsevier.com/locate/labeco

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Keywords: Generalized errors-in-variables model Life-cycle bias Lifetime income Guest workers;

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Cited by:
  1. Bönke, Timm & Corneo, Giacomo & Lüthen, Holger, 2011. "Lifetime Earnings Inequality in Germany," IZA Discussion Papers 6020, Institute for the Study of Labor (IZA).
  2. Black, Sandra & Devereux, Paul J., 2010. "Recent Developments in Intergenerational Mobility," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7786, C.E.P.R. Discussion Papers.
  3. Giorgio Brunello & Guglielmo Weber & Christoph Weiss, 2012. "Books are forever: Early life conditions, education and lifetime earnings in Europe," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0842, Institute of Social and Economic Research, Osaka University.
  4. Bhuller, Manudeep & Mogstad, Magne & Salvanes, Kjell G., 2011. "Life-Cycle Bias and the Returns to Schooling in Current and Lifetime Earnings," IZA Discussion Papers 5788, Institute for the Study of Labor (IZA).
  5. Regina Flake, 2011. "Gender Differences in the Intergenerational Earnings Mobility of Second-Generation Migrants," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0283, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  6. Brunello, Giorgio & Weber, Guglielmo & Weiss, Christoph T., 2012. "Books Are Forever: Early Life Conditions, Education and Lifetime Income," IZA Discussion Papers 6386, Institute for the Study of Labor (IZA).
  7. Chau, Tak Wai, 2012. "Intergenerational income mobility revisited: Estimation with an income dynamic model with heterogeneous age profile," Economics Letters, Elsevier, vol. 117(3), pages 770-773.
  8. Rolf Aaberge & Magne Mogstad, 2012. "Inequality in current and lifetime income," Discussion Papers, Research Department of Statistics Norway 726, Research Department of Statistics Norway.

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