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

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  • Brenner, Jan

Abstract

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.

Suggested Citation

  • Brenner, Jan, 2009. "Life-Cycle Variations in the Association between Current and Lifetime Earnings – Evidence for German Natives and Guest Workers," Ruhr Economic Papers 95, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
  • Handle: RePEc:zbw:rwirep:95
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    Cited by:

    1. Rolf Aaberge & Magne Mogstad, 2015. "Inequality in current and lifetime income," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 44(2), pages 217-230, February.
    2. repec:zbw:rwirep:0283 is not listed on IDEAS
    3. Black, Sandra E. & Devereux, Paul J., 2011. "Recent Developments in Intergenerational Mobility," Handbook of Labor Economics, Elsevier.
    4. Bhuller, Manudeep & Mogstad, Magne & Salvanes, Kjell G., 2011. "Life-Cycle Bias and the Returns to Schooling in Current and Lifetime Earnings," IZA Discussion Papers 5788, Institute for the Study of Labor (IZA).
    5. Brunello, Giorgio & Weber, Guglielmo & Weiss, Christoph T., 2012. "Books Are Forever: Early Life Conditions, Education and Lifetime Income," IZA Discussion Papers 6386, Institute for the Study of Labor (IZA).
    6. Daniel D. Schnitzlein, 2014. "A New Look at Intergenerational Mobility in Germany Compared to the US," SOEPpapers on Multidisciplinary Panel Data Research 689, DIW Berlin, The German Socio-Economic Panel (SOEP).
    7. Céline Lecavelier des Etangs-Levallois, 2017. "Overview of intergenerational earnings mobility in Germany," THEMA Working Papers 2017-11, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    8. repec:spr:izamig:v:7:y:2017:i:1:d:10.1186_s40176-017-0104-4 is not listed on IDEAS
    9. Timm Bönke & Giacomo Corneo & Holger Lüthen, 2015. "Lifetime Earnings Inequality in Germany," Journal of Labor Economics, University of Chicago Press, vol. 33(1), pages 171-208.
    10. Coban, Mustafa & Sauerhammer, Sarah, 2017. "Transmission channels of intergenerational income mobility: Empirical evidence from Germany and the Unites States," Discussion Paper Series 138, Julius Maximilian University of Würzburg, Chair of Economic Order and Social Policy.
    11. Flake, Regina, 2011. "Gender Differences in the Intergenerational Earnings Mobility of Second-Generation Migrants," Ruhr Economic Papers 283, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    12. Flake, Regina, 2013. "Gender Differences in the Earnings Mobility of Migrants," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 58-79.
    13. Pierre Brochu & Till Gross & Christopher Worswick, 2016. "Temporary Foreign Workers and Firms: Theory and Canadian Evidence," CReAM Discussion Paper Series 1628, Centre for Research and Analysis of Migration (CReAM), Department of Economics, University College London.
    14. Marco Bertoni & Giorgio Brunello, 2016. "Later-borns Don’t Give Up: The Temporary Effects of Birth Order on European Earnings," Demography, Springer;Population Association of America (PAA), vol. 53(2), pages 449-470, April.
    15. repec:bla:revinw:v:62:y:2016:i:4:p:650-667 is not listed on IDEAS
    16. Chau, Tak Wai, 2012. "Intergenerational income mobility revisited: Estimation with an income dynamic model with heterogeneous age profile," Economics Letters, Elsevier, vol. 117(3), pages 770-773.
    17. repec:wly:econjl:v:127:y:2017:i:600:p:271-296 is not listed on IDEAS
    18. Regina Flake, 2011. "Gender Differences in the Intergenerational Earnings Mobility of Second-Generation Migrants," Ruhr Economic Papers 0283, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    19. Giorgio Brunello & Guglielmo Weber & Christoph T. Weiss, 2017. "Books are Forever: Early Life Conditions, Education and Lifetime Earnings in Europe," Economic Journal, Royal Economic Society, vol. 127(600), pages 271-296, March.

    More about this item

    Keywords

    Generalized errors-in-variables model; life-cycle bias; lifetime income; guest workers;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers

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