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Life-Cycle Variations in the Association between Current and Lifetime Earnings – Evidence for German Natives and Guest Workers

  • Jan Brenner

    ()

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 15 years alleviates the attenuation bias as well as the difference in biases between natives and guest workers.

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Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0095.

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Length: 60 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:rwi:repape:0095
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  1. Arne Uhlendorff & Klaus F. Zimmermann, 2014. "Unemployment Dynamics among Migrants and Natives," Economica, London School of Economics and Political Science, vol. 81(322), pages 348-367, 04.
  2. Solon, Gary, 1999. "Intergenerational mobility in the labor market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 29, pages 1761-1800 Elsevier.
  3. Michael Baker & Gary Solon, 2003. "Earnings Dynamics and Inequality among Canadian Men, 1976-1992: Evidence from Longitudinal Income Tax Records," Journal of Labor Economics, University of Chicago Press, vol. 21(2), pages 267-288, April.
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  5. Amelie Constant & Douglas S. Massey, 2003. "Self-selection, earnings, and out-migration: A longitudinal study of immigrants to Germany," Journal of Population Economics, Springer, vol. 16(4), pages 631-653, November.
  6. Jan M. Hoem, 2005. "Why does Sweden have such high fertility?," MPIDR Working Papers WP-2005-009, Max Planck Institute for Demographic Research, Rostock, Germany.
  7. Constant, Amelie & Zimmermann, Klaus F, 2006. "Legal Status at Entry, Economic Performance and Self-Employment Proclivity: A Bi-National Study of Immigrants," CEPR Discussion Papers 5696, C.E.P.R. Discussion Papers.
  8. 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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  10. Chris Carroll & Lawrence H. Summers, 1989. "Consumption Growth Parallels Income Growth: Some New Evidence," NBER Working Papers 3090, National Bureau of Economic Research, Inc.
  11. Steven Haider & Gary Solon, 2006. "Life-Cycle Variation in the Association between Current and Lifetime Earnings," NBER Working Papers 11943, National Bureau of Economic Research, Inc.
  12. Hammarstedt, Mats & Palme, Mårten, 2006. "Intergenerational Mobility, Human Capital Transmission and the Earnings of Second-Generation Immigrants in Sweden," IZA Discussion Papers 1943, Institute for the Study of Labor (IZA).
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  14. Lindquist, Matthew J. & Böhlmark, Anders, 2005. "Life-Cycle Variations in the Association between Current and Lifetime Income: Country, Cohort and Gender Comparisons," Working Paper Series 4/2005, Swedish Institute for Social Research.
  15. Bhashkar Mazumder, 2005. "Fortunate Sons: New Estimates of Intergenerational Mobility in the United States Using Social Security Earnings Data," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 235-255, May.
  16. Anders Bohlmark & Matthew J. Lindquist, 2006. "Life-Cycle Variations in the Association between Current and Lifetime Income: Replication and Extension for Sweden," Journal of Labor Economics, University of Chicago Press, vol. 24(4), pages 879-900, October.
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  18. Borjas, George J, 1994. "Immigrant Skills and Ethnic Spillovers," Journal of Population Economics, Springer, vol. 7(2), pages 99-118.
  19. Grawe, Nathan D., 2006. "Lifecycle bias in estimates of intergenerational earnings persistence," Labour Economics, Elsevier, vol. 13(5), pages 551-570, October.
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