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

Peter Gottschalk () and Minh Huynh
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Minh Huynh: U.S. Social Security Administration

No 649, Boston College Working Papers in Economics from Boston College Department of Economics

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.

New Economics Papers: this item is included in nep-ltv
Date: 2006-08-02
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Working Paper: Are Earnings Inequality and Mobility Overstated? The Impact of Non-Classical Measurement Error (2006)
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