Are Earnings Inequality and Mobility Overstated? The Impact of Non-Classical Measurement Error

33 Pages Posted: 15 Oct 2006

See all articles by Peter Gottschalk

Peter Gottschalk

Boston College; IZA Institute of Labor Economics

Minh Huynh

U.S. Social Security Administration

Date Written: September 2006

Abstract

Measures of inequality and mobility based on self-reported earnings reflect attributes of both the joint distribution of earnings across time and the joint distribution of measurement error and earnings. While classical measurement error would increase measures of inequality and mobility there is substantial evidence that measurement error in earnings is not classical. In this paper we present the analytical links between non-classical measurement error and measures of inequality and mobility. The empirical importance of non-classical measurement error is explored using the Survey of Income and Program Participation matched to tax records. We find that the effects of non-classical measurement error are large. However, these non-classical effects are largely offsetting when estimating mobility. As a result SIPP estimates of mobility are similar to estimates based on tax records, though SIPP estimates of inequality are smaller than estimates based on tax records.

Keywords: measurement error, earnings mobility and inequality

JEL Classification: J30

Suggested Citation

Gottschalk, Peter and Huynh, Minh, Are Earnings Inequality and Mobility Overstated? The Impact of Non-Classical Measurement Error (September 2006). IZA Discussion Paper No. 2327, Available at SSRN: https://ssrn.com/abstract=937340 or http://dx.doi.org/10.2139/ssrn.937340

Peter Gottschalk (Contact Author)

Boston College ( email )

Chestnut Hill, MA 02167
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Minh Huynh

U.S. Social Security Administration ( email )

Washington, DC 20254
United States

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