Life cycle bias in the estimation of intergenerational earnings persistence
by
Nathan Grawe
Family and Labour Studies Division
Analytical Studies Branch
research paper series, No. 207
Context
There is a wide variation
in estimates of intergenerational earnings persistence (the elasticity of son's
earnings with respect to father's earnings) in studies of intergenerational earnings
mobility even within a country or data set across different studies. Methodological
differences, measurement problems due to unavailability of permanent, lifetime
earnings in the data partly explain this variation in the results. However, empirical
studies of intergenerational mobility have paid no attention to increasing transitory
earnings variance and the changes in earnings variance across the life cycle suggested
by economic models of human capital investment. Identifying the effects of these
two factors may help explain the varying results among studies.
Objectives
The
paper studies the degree to which attenuation bias (increase in transitory earnings
variance) and life cycle models of human capital investment account for the variation
in earnings persistence estimates across the lifecycle.
Findings
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.
Data sources: Canada:
Intergenerational income data.
United States: National Longitudinal Survey,
Panel Study of Income Dynamics.
View
the full publication.
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