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Life Cycle Bias in the Estimation of Intergenerational Earnings Persistence

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  • Grawe, Nathan D.

Abstract

The estimation of intergenerational earnings mobility is rife with measurement problems since the research does not observe permanent, lifetime earnings. Nearly all studies make corrections for mean variation in earnings because of the age differences among respondents. Recent works employ average earnings or instrumental variable methods to address the effects of measurement error as a result of transitory earnings shocks and mis-reporting. However, empirical studies of intergenerational mobility have paid no attention to the changes in earnings variance across the life cycle suggested by economic models of human capital investment. Using information from the Intergenerational Income Data from Canada and the National Longitudinal Survey and Panel Study of Income Dynamics from the United States, this study finds a strong association between age at observation and estimated earnings persistence. Part of this age-dependence is related to a general increase in transitory earnings variance during the collection of data. An independent effect of life cycle investment is also identified. These findings are then applied to the variation among intergenerational earnings persistence studies. Among studies with similar methodologies, one-third of the variance in published estimates of earnings persistence is attributable to cross-study differences in the age of responding fathers. Finally, these results call into question tests for the importance of credit constraints based on measures of earnings at different points in the life cycle.

Suggested Citation

  • 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.
  • Handle: RePEc:stc:stcp3e:2003207e
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    Cited by:

    1. Viviane Azevedo & Cesar Bouillon, 2009. "Social Mobility in Latin America: A Review of Existing Evidence," Research Department Publications 4634, Inter-American Development Bank, Research Department.
    2. Büchner, C.I.R. & Cörvers, F. & Traag, T. & van der Velden, R.K.W., 2012. "How do education, cognitive skills, cultural and social capital account for intergenerational earnings persistence? Evidence from the Netherlands," ROA Research Memorandum 007, Maastricht University, Research Centre for Education and the Labour Market (ROA).
    3. Hendricks, Lutz, 2007. "The intergenerational persistence of lifetime earnings," European Economic Review, Elsevier, vol. 51(1), pages 125-144, January.
    4. Ramses Abul Naga, 2008. "Biases of the ordinary least squares and instrumental variables estimators of the intergenerational earnings elasticity: Revisited in the light of panel data," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 6(4), pages 323-350, December.
    5. Nicoletti Cheti & Ermisch John F, 2008. "Intergenerational Earnings Mobility: Changes across Cohorts in Britain," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(2), pages 1-38, January.
    6. Honge Gong & Andrew Leigh & Xin Meng, 2012. "Intergenerational Income Mobility In Urban China," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 58(3), pages 481-503, September.
    7. Cheti Nicoletti & Marco Francesconi, 2006. "Intergenerational mobility and sample selection in short panels," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(8), pages 1265-1293.
    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.
    9. Bratberg, Espen & Nilsen, Øivind Anti & Vaage, Kjell, 2008. "Job losses and child outcomes," Labour Economics, Elsevier, vol. 15(4), pages 591-603, August.
    10. Blanden, Jo & Alissa Goodman & Paul Gregg & Stephen Machin, 2002. "Changes in Intergenerational Mobility in Britain," Royal Economic Society Annual Conference 2002 31, Royal Economic Society.
    11. Grawe, Nathan D., 2001. "In Search of Intergenerational Credit Constraints Among Canadian Men: Quantile Versus Mean Regression Tests for Binding Credit Constraints," Analytical Studies Branch Research Paper Series 2001158e, Statistics Canada, Analytical Studies Branch.
    12. Björklund, Anders & Jäntti, Markus & Lindquist, Matthew J., 2009. "Family background and income during the rise of the welfare state: Brother correlations in income for Swedish men born 1932-1968," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 671-680, June.
    13. Büchner Charlotte & Cörvers Frank & Traag Tanja & Velden Rolf van der, 2012. "How do education, cognitive skills, cultural and social capital account for intergenerational earnings persistence? Evidence from the Netherlands," ROA Research Memorandum 007, Maastricht University, Research Centre for Education and the Labour Market (ROA).
    14. Corak, Miles, 2006. "Do Poor Children Become Poor Adults? Lessons from a Cross Country Comparison of Generational Earnings Mobility," IZA Discussion Papers 1993, Institute of Labor Economics (IZA).

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