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The mis-measurement of permanent earnings: new evidence from Social Security earnings data

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  • Bhashkar Mazumder

Abstract

This study investigates the reliability of using short-term averages of earnings as a proxy for permanent earnings in empirical research. An earnings dynamics model is estimated on a large sample of men covering the period from 1983 to 1997 following the cohort-based methodology of Baker and Solon (1999). The analysis uses a unique dataset that matches men in the 1984, 1990 and 1996 Surveys of Income and Program Participation (SIPP) to the Social Security Administration's Summary Earnings Records (SER). The results confirm that using a short-term average of earnings can lead to spurious estimates of the effect of lifetime earnings on a particular outcome. In addition, the transitory variance appears to vary considerably over the lifecycle. The share of earnings variance due to transitory factors is higher among blacks and the persistence of transitory shocks appears to be greater for this group as well. Finally, the transitory variance appears to be a more important factor in explaining the overall earnings variance of college educated men than those without college.

Suggested Citation

  • Bhashkar Mazumder, 2001. "The mis-measurement of permanent earnings: new evidence from Social Security earnings data," Working Paper Series WP-01-24, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:wp-01-24
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    References listed on IDEAS

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    Cited by:

    1. Jørgen Modalsli & Kelly Vosters, 2024. "Spillover Bias in Multigenerational Income Regressions," Journal of Human Resources, University of Wisconsin Press, vol. 59(3), pages 743-776.
    2. Edward N. Wolff, 2018. "The Decline of African-American and Hispanic Wealth since the Great Recession," NBER Working Papers 25198, National Bureau of Economic Research, Inc.
    3. Steven Haider & Gary Solon, 2006. "Life-Cycle Variation in the Association between Current and Lifetime Earnings," American Economic Review, American Economic Association, vol. 96(4), pages 1308-1320, September.
    4. Chelsea Murray & Robert Graham Clark & Silvia Mendolia & Peter Siminski, 2018. "Direct Measures of Intergenerational Income Mobility for Australia," The Economic Record, The Economic Society of Australia, vol. 94(307), pages 445-468, December.
    5. Brenner, Jan, 2010. "Life-cycle variations in the association between current and lifetime earnings: Evidence for German natives and guest workers," Labour Economics, Elsevier, vol. 17(2), pages 392-406, April.
    6. Lindquist, Matthew J. & Böhlmark, Anders, 2005. "Life-Cycle Variations in the Association between Current and Lifetime Income: Country, Cohort and Gender Comparisons," Working Paper Series 4/2005, Stockholm University, Swedish Institute for Social Research.
    7. Jesse Rothstein & Nathan Wozny, 2013. "Permanent Income and the Black-White Test Score Gap," Journal of Human Resources, University of Wisconsin Press, vol. 48(3), pages 510-544.
    8. Maury Gittleman & Edward N. Wolff, 2004. "Racial Differences in Patterns of Wealth Accumulation," Journal of Human Resources, University of Wisconsin Press, vol. 39(1).
    9. Bhashkar Mazumder & Jonathan Davis, 2011. "Parental Earnings and Children's Well-Being and Future Success: An Analysis of the SIPP Matched to SSA Earnings Data," Working Papers 11-12, Center for Economic Studies, U.S. Census Bureau.
    10. Corak, Miles & Lindquist, Matthew J. & Mazumder, Bhashkar, 2014. "A comparison of upward and downward intergenerational mobility in Canada, Sweden and the United States," Labour Economics, Elsevier, vol. 30(C), pages 185-200.
    11. Anders Bohlmark & Matthew J. Lindquist, 2006. "Life-Cycle Variations in the Association between Current and Lifetime Income: Replication and Extension for Sweden," Journal of Labor Economics, University of Chicago Press, vol. 24(4), pages 879-900, October.
    12. Nilsen, Øivind Anti & Vaage, Kjell & Aakvik, Arild & Jacobsen, Karl, 2008. "Estimates of Intergenerational Elasticities Based on Lifetime Earnings," IZA Discussion Papers 3709, Institute of Labor Economics (IZA).

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    Keywords

    Income; Social security; Wages;
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