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A Cautionary Note on Using Industry Affiliation to Predict Income

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  • Jörn-Steffen Pischke
  • Hannes Schwandt

Abstract

Many literatures investigate the causal impact of income on economic outcomes, for example in the context of intergenerational transmission or well-being and health. Some studies have proposed to use employer wage differentials and in particular industry affiliation as an instrument for income. We demonstrate that industry affiliation is correlated with fixed individual characteristics, specifically parents' education and own height, conditional on the covariates typically controlled for in these studies. These results suggest that there is selection into industries based on unobservables. As a result the exclusion restriction in many IV studies of this type is likely violated.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1163.

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Date of creation: Sep 2012
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Handle: RePEc:cep:cepdps:dp1163

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: industry wage differentials; health; happiness; intergenerational mobility;

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  1. Ackerberg, Daniel & Devereux, Paul J., 2008. "Improved JIVE Estimators for Overidentified Linear Models with and without Heteroskedasticity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6926, C.E.P.R. Discussion Papers.
  2. Pischke, Jörn-Steffen, 2011. "Money and Happiness: Evidence from the Industry Wage Structure," IZA Discussion Papers 5705, Institute for the Study of Labor (IZA).
  3. Carmit Segal, 2006. "Motivation, test scores and economic success," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1124, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2008.
  4. Ritschl, Albrecht, 2012. "The German Transfer Problem, 1920-1933: A Sovereign Debt Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9062, C.E.P.R. Discussion Papers.
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Cited by:
  1. Warn N. Lekfuangfu & Nattavudh Powdthavee & Mark Wooden, 2013. "The Marginal Income Effect of Education on Happiness: Estimating the Direct and Indirect Effects of Compulsory Schooling on Well-Being in Australia," CEP Discussion Papers, Centre for Economic Performance, LSE dp1214, Centre for Economic Performance, LSE.
  2. Ambrey, Christopher L. & Chan, Andrew Yiu-Chung & Fleming, Christopher M., 2013. "Estimating the cost of air pollution in South East Queensland: An application of the life satisfaction non-market valuation approach," 2013 Conference (57th), February 5-8, 2013, Sydney, Australia, Australian Agricultural and Resource Economics Society 152133, Australian Agricultural and Resource Economics Society.
  3. Ambrey, Christopher L. & Fleming, Christopher M. & Chan, Andrew Yiu-Chung, 2014. "Estimating the cost of air pollution in South East Queensland: An application of the life satisfaction non-market valuation approach," Ecological Economics, Elsevier, Elsevier, vol. 97(C), pages 172-181.
  4. Vendrik, Maarten C.M., 2013. "Adaptation, anticipation and social interaction in happiness: An integrated error-correction approach," Journal of Public Economics, Elsevier, Elsevier, vol. 105(C), pages 131-149.
  5. Levinson, Arik, 2012. "Valuing public goods using happiness data: The case of air quality," Journal of Public Economics, Elsevier, Elsevier, vol. 96(9-10), pages 869-880.

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