Measurement and Cross-Country Differences

This latter type of measurement error generates the

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Unformatted text preview: , y0t ) ˆ plim 2 y1 Numerous researchers have indeed reported that they estimate relatively small intergenerational elasticities if they measure son’s earnings near the very beginning of his career, but that their estimates get larger as son’s earnings are measured further along in the lifecycle. Fortin – Econ 560 Lecture 5B This generates a problem of mean-reversion (the tendency for a stochastic process to remain near, or to return over time to its long-run average value). As explained by Bound et al. (1994), mean-reverting measurement error in a regression’s dependent variable compresses its variation and consequently leads to a tendency to underestimate the magnitude of the regression’s slope coefficient. A first solution to the estimation of long-run earnings was to average earnings over multiple years. Given that there are a few panel data sets in the U.S., this strategy was used in a number of studies. Several studies have also used IV as a second way to address the measurement error problem, using education, sex, occupation, industry dummies (e.g. Mulligan, 1997) and the index Duncan index of socioeconomic status (Zimmerman, 1992) as instruments. This strategy has its own problems (Kim and Solon, 2005). The summary of the U.S. literature is that studies that have used multi-year measures of father’s earnings and have measured son’s earnings after his first few ˆ years in the labor market have estimated about 0.4 or higher. Source: Solon (1999) Source: Solon (1999) Fortin – Econ 560 Lecture 5B There are some problems with the use of these panel data. The intergenerational samples that can be constructed from the PSID and NLS are relatively small, and there is also considerable attrition in these data sets. Moreover, there are some cohort issues with the NLS. 2. Use of Administrative Data Another source of longitudinal data is provided by administrative data, such as income tax data or social security data. These data have the advantage of large sample size and potentially long observation win...
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