A Cautionary Note on Using Industry Affiliation to Predict Income

28 Pages Posted: 18 Sep 2012 Last revised: 27 Mar 2022

See all articles by Jörn-Steffen Pischke

Jörn-Steffen Pischke

London School of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Hannes Schwandt

Princeton University - Center for Health and Wellbeing

Multiple version iconThere are 3 versions of this paper

Date Written: September 2012

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.

Suggested Citation

Pischke, Jörn-Steffen (Steve) and Schwandt, Hannes, A Cautionary Note on Using Industry Affiliation to Predict Income (September 2012). NBER Working Paper No. w18384, Available at SSRN: https://ssrn.com/abstract=2148268

Jörn-Steffen (Steve) Pischke (Contact Author)

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Hannes Schwandt

Princeton University - Center for Health and Wellbeing ( email )

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