Empirical Strategies to Eliminate Life-Cycle Bias in the Intergenerational Elasticity of Earnings Literature

I argue that the empirical strategies for estimation of the intergenerational elasticity of lifetime earnings that are currently employed in the literature might not eliminate bias arising from life-cycle effects. Specifically, I demonstrate that procedures based on the generalized errors-in-variables model suggested by Haider and Solon (2006) or the consideration of differential earnings growth rates across subpopulations may not yield unbiased or consistent estimates. I further argue that instrumental variable estimators will not identify an upper bound for the true population parameter.intergenerational mobility, intergenerational elasticity of earnings, life-cycle bias, generalized errors-in-variables model

Empirical Strategies to Eliminate Life-Cycle Bias in the Intergenerational Elasticity of Earnings Literature

I argue that the empirical strategies for estimation of the intergenerational elasticity of lifetime earnings that are currently employed in the literature might not eliminate bias arising from life-cycle effects. Specifically, I demonstrate that procedures based on the generalized errors-in-variables model suggested by Haider and Solon (2006) or the consideration of differential earnings growth rates across subpopulations may not yield unbiased or consistent estimates. I further argue that instrumental variable estimators will not identify an upper bound for the true population parameter.intergenerational mobility, intergenerational elasticity of earnings, life-cycle bias, generalized errors-in-variables model

Heterogeneous Income Profiles and Life-Cycle Bias in Intergenerational Mobility Estimation

Research on intergenerational income mobility is based on current income since data on lifetime income are typically not available for two generations. However, using snapshots of income over shorter periods causes a so-called life-cycle bias if the snapshots cannot mimic lifetime outcomes. Using uniquely long series of Swedish income data, we show that current empirical strategies do not eliminate such bias. We focus on the widely adopted generalized errors-in-variables model and find that the remaining bias is substantial (20% of the true elasticity from left-side measurement error at the most relevant age range). IV estimates suffer from even stronger life-cycle effects and do not provide an upper bound. Inconsistencies stem from the interaction of two factors: heterogeneity in income profiles cannot be fully accounted for, and idiosyncratic deviations from average profiles correlate with individual characteristics and family background. We discuss implications of our findings for other literatures that depend on measurement of long-run income and income dynamics.intergenerational mobility, intergenerational income elasticity, life-cycle bias, non-classical measurement error, generalized errors-in-variables model, heterogeneous income profiles

Mobility across multiple generations: The iterated regression fallacy

Conflicting views about the degree of long-run mobility across multiple generations persist because direct empirical evidence is scarce. Predictions are instead routinely derived by iteration of intergenerational measures, a procedure which implies high long-run mobility even when intergenerational mobility is low. However, the assumption that regression implies perpetual regression is a statistical fallacy. I examine this fallacy, its historical background, and its prevalence. I then present various simple models of intergenerational transmission to consider how the relation between intergenerational and multigenerational mobility is affected by elements of the transmission process. I discuss the role of market luck and indirect transmission; the multiplicity of skills; the role of grandparents; and the causal effect of parental income. The direction of bias depends on modeling assumptions, but elementary properties of the transmission process imply that long-run mobility will likely be lower, possibly much lower, than predictions from intergenerational evidence suggest

Biases in standard measures of intergenerational income dependence

Estimates of the most common mobility measure, the intergenerational elasticity, can be severely biased if snapshots are used to approximate lifetime income. However, little is known about biases in other popular dependence measures. We use long Swedish income series to provide such evidence for linear and rank correlations, and rank-based transition probabilities. Attenuation bias is considerably weaker in rank-based measures. Life-cycle bias is strongest in the elasticity; moderate in the linear correlation; and small in rank-based measures. However, with important exceptions: persistence in the tails of the distribution is considerably higher, and long-distance downward mobility considerably lower, than estimates from short-run income suggest

Interpreting Trends in Intergenerational Income Mobility

We examine how intergenerational income mobility responds to structural changes in a simple theoretical model of intergenerational transmission, deviating from the existing literature by explicitly analyzing the transition path between steady states. We find that mobility depends not only on current but also on past transmission mechanisms, such that changing policies, institutions or economic conditions may generate long-lasting trends. Variation in mobility levels across countries may thus be partly explained by differences in former institutions; current mobility trends may be caused by institutional changes in the past. We further find that transitions between steady states tend to be non-monotonic. Changes in the relative returns to different skills or a shift towards a less plutocratic and more meritocratic economy raise mobility initially, but also generate a negative trend over subsequent generations. Times of change thus tend to be times of high mobility, and declining mobility today may not reflect a recent deterioration of equality of opportunity but rather major improvements made in the past

Heterogeneous income profiles and life-cycle bias in intergenerational mobility estimation

Research on intergenerational income mobility is based on current income since data on lifetime income are typically not available for two generations. However, using snapshots of income over shorter periods causes a so-called life-cycle bias if the snapshots cannot mimic lifetime outcomes. Using uniquely long series of Swedish income data, we show that current empirical strategies do not eliminate such bias. We focus on the widely adopted generalized errors-in-variables model and find that the remaining bias is substantial (20% of the true elasticity from left-side measurement error at the most relevant age range). IV estimates suffer from even stronger life-cycle effects and do not provide an upper bound. Inconsistencies stem from the interaction of two factors: heterogeneity in income profiles cannot be fully accounted for, and idiosyncratic deviations from average profiles correlate with individual characteristics and family background. We discuss implications of our findings for other literatures that depend on measurement of long-run income and income dynamics

Report No. 15: Die fiskalischen Kosten der SGB-Regelungen zum erleichterten Bezug von Arbeitslosengeld für Ältere (58er-Regelung)

Bericht im Auftrag der Initiative Neue Soziale Marktwirtschaft, Bonn 2007 (16 Seiten)

The transmission of inequality across multiple generations: testing recent theories with evidence from Germany

This article shows that across multiple generations, the persistence of occupational and educational attainment in Germany is larger than estimates from two generations suggest. We consider two recent interpretations. First, we assess Gregory Clark's hypotheses that the true rate of intergenerational persistence is higher than the observed rate, as high as 0.75, and time-invariant. Our evidence supports the first but not the other two hypotheses. Second, we test for independent effects of grandparents. We show that the coefficient on grandparent status is positive in a wide class of Markovian models and present evidence against its causal interpretation.Jan Stuhler gratefully acknowledges support from the Ministerio Economía y Competitividad (Spain, MDM 2014-0431 and ECO2014-55858-P) and Comunidad de Madrid (MadEco-CM S2015/HUM-3444)

A Review of Intergenerational Mobility and its Drivers

This report reviews evidence on intergenerational mobility and the transmission of socio-economic advantages from parents to children. The review examines conceptual questions on how to measure intergenerational mobility, empirical evidence on both descriptive and causal questions, and the data requirements that mobility research faces. The extent of income mobility varies substantially between countries, and appears negatively correlated with income inequality both across and within countries. For this reason, there is particular interest on mobility trends over time in those countries where income inequality has recently been increasing. However, the evidence for mobility trends in more recent cohorts is as yet less conclusive. Descriptive associations can only be suggestive of causal links, and the report also reviews evidence from more targeted research designs on the importance of (i) neighbourhoods and schools, (ii) early childhood and childcare, (iii) educational systems and track choice, (iv) private and public education, and (v) informational frictions and beliefs. The evidence demonstrates that educational policies can affect intergenerational mobility. An important trend in these and other literatures is the increasing use of administrative data sources, such as social security or tax data. The review discusses important hurdles in their adoption for mobility research, and points to data initiatives that could improve our understanding of intergenerational processes in the future.JRC.B.4-Human Capital and Employmen