The Mis-Measurement of Permanent Earnings: New Evidence from Social Security Earnings Data
AbstractThis 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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Bibliographic InfoPaper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 02-12.
Date of creation: May 2002
Date of revision:
CES; economic; research; micro; data; microdata; chief; economist;
Other versions of this item:
- Bhashkar Mazumder, 2001. "The mis-measurement of permanent earnings: new evidence from Social Security earnings data," Working Paper Series WP-01-24, Federal Reserve Bank of Chicago.
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