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Using the Pareto Distribution to Improve Estimates of Topcoded Earnings

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  • Philip Armour
  • Richard V. Burkhauser
  • Jeff Larrimore

Abstract

Inconsistent censoring of top earnings in the public-use March Current Population Survey (CPS) is an important limitation in using it to measure labor earnings trends. Using less-censored internal CPS data, combined with Pareto estimates from it for internally censored observations, we create an enhanced cell-mean series to capture top earnings in the public-use CPS. We find previous common approaches for imputing topcoded earnings systematically understate top earnings. Annual earnings inequality trends since 1963 using our series closely approximate the substantial increase in earnings inequality observed in Social Security Administration data for working-age commerce and industry workers by Kopczuk, Saez, and Song (2010). However, when considering all workers the level of earnings inequality is higher but the increase over this time has been more modest.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19846.

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Date of creation: Jan 2014
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Handle: RePEc:nbr:nberwo:19846

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  1. R. Quandt, 1966. "Old and new methods of estimation and the pareto distribution," Metrika, Springer, Springer, vol. 10(1), pages 55-82, December.
  2. Lawrence F. Katz & Kevin M. Murphy, 1991. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," NBER Working Papers 3927, National Bureau of Economic Research, Inc.
  3. Bishop, John A & Chiou, Jong-Rong & Formby, John P, 1994. "Truncation Bias and the Ordinal Evaluation of Income Inequality," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 12(1), pages 123-27, January.
  4. Stephen P. Jenkins & Richard V. Burkhauser & Shuaizhang Feng & Jeff Larrimore, 2011. "Measuring inequality using censored data: a multipleā€imputation approach to estimation and inference," Journal of the Royal Statistical Society Series A, Royal Statistical Society, Royal Statistical Society, vol. 174(1), pages 63-81, January.
  5. Daron Acemoglu, 2000. "Technical Change, Inequality, and the Labor Market," NBER Working Papers 7800, National Bureau of Economic Research, Inc.
  6. Fichtenbaum, Rudy & Shahidi, Hushang, 1988. "Truncation Bias and the Measurement of Income Inequality," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 6(3), pages 335-37, July.
  7. Thomas Lemieux, 2006. "Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill?," American Economic Review, American Economic Association, American Economic Association, vol. 96(3), pages 461-498, June.
  8. David Card & John E. DiNardo, 2002. "Skill-Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 20(4), pages 733-783, October.
  9. David H. Autor & Lawrence F. Katz & Melissa S. Kearney, 2008. "Trends in U.S. Wage Inequality: Revising the Revisionists," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 300-323, May.
  10. Jeff Larrimore & Richard Burkhauser & Shuaizhang Feng & Laura Zayatz, 2008. "Consistent Cell Means for Topcoded Incomes in the Public Use March CPS (1976-2007)," Working Papers, Center for Economic Studies, U.S. Census Bureau 08-06, Center for Economic Studies, U.S. Census Bureau.
  11. Emmanuel Saez, 2000. "Using Elasticities to Derive Optimal Income Tax Rates," NBER Working Papers 7628, National Bureau of Economic Research, Inc.
  12. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2010. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States: 1967-2006," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 15-51, January.
  13. Wojciech Kopczuk & Emmanuel Saez & Jae Song, 2010. "Earnings Inequality and Mobility in the United States: Evidence from Social Security Data since 1937," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 125(1), pages 91-128, February.
  14. Thomas Piketty & Emmanuel Saez, 2003. "Income Inequality In The United States, 1913-1998," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 118(1), pages 1-39, February.
  15. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(3), pages 410-42, June.
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