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The Mis-Measurement of Permanent Earnings: New Evidence from Social Security Earnings Data

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Author Info
Bhashkar Mazumder
Abstract

This study investigates the reliability of using short-term averages of earnings as a proxy for permanent earnings in empirical research. An earnings dynamics model is estimated on a large sample of men covering the period from 1983 to 1997 following the cohort-based methodology of Baker and Solon (1999). The analysis uses a unique dataset that matches men in the 1984, 1990 and 1996 Surveys of Income and Program Participation (SIPP) to the Social Security Administration’s Summary Earnings Records (SER). The results confirm that using a short-term average of earnings can lead to spurious estimates of the effect of lifetime earnings on a particular outcome. In addition, the transitory variance appears to vary considerably over the lifecycle. The share of earnings variance due to transitory factors is higher among blacks and the persistence of transitory shocks appears to be greater for this group as well. Finally, the transitory variance appears to be a more important factor in explaining the overall earnings variance of college educated men than those without college.

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File URL: http://www.ces.census.gov/index.php/ces/cespapers?down_key=101643
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Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 02-12.

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Date of creation: May 2002
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Handle: RePEc:cen:wpaper:02-12

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Web page: http://www.ces.census.gov

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Related research
Keywords: CES; economic; research; micro; data; microdata; chief; economist;

References listed on IDEAS
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  1. David M. Blau, 1999. "The Effect Of Income On Child Development," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 261-276, May. [Downloadable!] (restricted)
  2. Stephen V. Cameron & James J. Heckman, 2001. "The Dynamics of Educational Attainment for Black, Hispanic, and White Males," Journal of Political Economy, University of Chicago Press, vol. 109(3), pages 455-499, June. [Downloadable!] (restricted)
  3. Peter Gottschalk & Robert Moffitt, 1994. "The Growth of Earnings Instability in the U.S. Labor Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1994-2), pages 217-272. [Downloadable!]
  4. Grawe, Nathan D., 2003. "Life Cycle Bias in the Estimation of Intergenerational Earnings Persistence," Analytical Studies Branch Research Paper Series 2003207e, Statistics Canada, Analytical Studies Branch. [Downloadable!]
  5. Bound, John & Krueger, Alan B, 1991. "The Extent of Measurement Error in Longitudinal Earnings Data: Do Two Wrongs Make a Right?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 1-24, January. [Downloadable!] (restricted)
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  6. Corak, Miles & Heisz, Andrew, 1998. "The Intergenerational Earnings and Income Mobility of Canadian Men: Evidence from Longitudinal Income Tax Data," Analytical Studies Branch Research Paper Series 1998113e, Statistics Canada, Analytical Studies Branch. [Downloadable!]
  7. Jacob Mincer, 1991. "Human Capital, Technology, and the Wage Structure: What Do Time Series Show?," NBER Working Papers 3581, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Clark, Todd E, 1996. "Small-Sample Properties of Estimators of Nonlinear Models of Covariance Structure," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 367-73, July.
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  9. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-45, March. [Downloadable!] (restricted)
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  10. David Card, 1991. "Intertemporal Labor Supply: An Assessment," NBER Working Papers 3602, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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