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USING THE PARETO DISTRIBUTION TO IMPROVE ESTIMATES OF TOPCODED EARNINGS
April 2014
Working Paper Number:
CES-14-21
Inconsistent censoring in the public-use March Current Population Survey (CPS) limits its usefulness in measuring labor earnings trends. Using Pareto estimation methods with less-censored internal CPS data, we create an enhanced cell-mean series to capture top earnings in the public-use CPS. We find that previous approaches for imputing topcoded earnings systematically understate top earnings. Annual earnings inequality trends since 1963 using our series closely approximate those found by Kopczuk, Saez, & Song (2010) using Social Security Administration data for commerce and industry workers. However, when we consider all workers, earnings inequality levels are higher but earnings growth is more modest
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GLOBALIZATION AND TOP INCOME SHARES
February 2014
Working Paper Number:
CES-14-07
How does globalization affect the income gaps between the rich and the poor? This paper presents a new piece of empirical evidence showing that access to the global market, either through exporting or through multinational production, is associated with a higher executive-to-worker pay ratio within the firm. It then builds a model with heterogeneous firms, occupational choice, and executive compensation to model analytically and assess quantitatively the impact of globalization on the income gaps between the rich and the poor. The key mechanism is that the 'gains from trade' are not distributed evenly within the same firm. The compensation of an executive is positively linked to the size of the firm, while the wage paid to the workers is determined in a country- wide labor market. Any extra profit earned in the foreign markets benefits the executives more than the average worker. Counterfactual exercises suggest that this new channel is quantitatively important for the observed surge in top income shares in the data. Using the changes in the volume of trade and multinational firm sales, the model can explain around 33 percent of the surge in top income shares over the past two decades in the United States.
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When It Rains It Pours: Under What Circumstances Does Job Loss Lead to Divorce
December 2013
Working Paper Number:
CES-13-62
Much of the previous research that has examined the effect of job loss on the probability of divorce rely on data from the 1970s-80s, a period of dramatic change in marital formation and dissolution. It is unclear how well this research pertains to more recent trends in marriage, divorce, and female labor force participation. This study uses data from the Survey of Income and Program Participation (SIPP) from 2000 to 2012 (thus including effects of the Great Recession) to examine how displacement (i.e., exogenous job loss) affects the probability of divorce. The author finds clear evidence that the effects of displacement appear to be asymmetric depending upon the gender of the job loser. Specifically, displacement significantly increases the probability of divorce but only if the husband is the spouse that is displaced and his earnings represented approximately half of the household's earnings prior to displacement. Similarly, results show that the probability of divorce increases if the wife is employed and as her earnings increase. While the mechanism behind these asymmetric results remains unclear, these results are consistent with recent research that finds a destabilizing effect on marriages when a wife earns more than her husband.
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Don't Quit Your Day Job: Using Wage and Salary Earnings to Support a New Business
September 2013
Working Paper Number:
CES-13-45
This paper makes use of a newly constructed Census Bureau dataset that follows the universe of sole proprietors, employers and non-employers, over 10 years and links their transitions to their activity as employees earning wage and salary income. By combining administrative data on sole proprietors and their businesses with quarterly administrative data on wage and salary jobs held by the same individuals both preceding and concurrent with business startup, we create the unique opportunity to quantify significant workforce dynamics that have up to now remained unobserved. The data allow us to take a first glimpse at these business owners as they initiate business ventures and make the transition from wage and salary work to business ownership and back. We find that the barrier between wage and salary work and self-employment is extremely fluid, with large flows occurring in both directions. We also observe that a large fraction of business owners takeon both roles simultaneously and find that this labor market diversification does have implications for the success of the businesses these owners create. The results for employer transitions to exit and non-employer suggest that there is a 'don't quit your day job' effect that is present for new businesses. Employers are more likely to stay employers if they have a wage and salary job in the year just prior to the transitions that we are tracking. It is especially important to have a stable wage and salary job but there is also evidence that higher earnings from the wage and salary job makes transition less likely. For nonemployers we find roughly similar patterns but there are some key differences. We find that having recent wage and salary income (and having higher earnings from such wage and salary activity) increases the likelihood of survival. Having recent stable wage and salary income decreases the likelihood of a complete exit but increases the likelihood of transiting to be an employer. Having recent wage and salary income in the same industry as the non-employer business has a large and positive impact on the likelihood of transiting to being a non-employer business.
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Occupation Inflation in the Current Population Survey
September 2012
Working Paper Number:
CES-12-26
A common caveat often accompanying results relying on household surveys regards respondent error. There is research using independent, presumably error-free administrative data, to estimate the extent of error in the data, the correlates of error, and potential corrections for the error. We investigate measurement error in occupation in the Current Population Survey (CPS) using the panel component of the CPS to identify those that incorrectly report changing occupation. We find evidence that individuals are inflating their occupation to higher skilled and higher paying occupations than the ones they actually perform. Occupation inflation biases the education and race coefficients in standard Mincer equation results within occupations.
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Estimating Measurement Error in SIPP Annual Job Earnings: A Comparison of Census Bureau Survey and SSA Administrative Data
July 2011
Working Paper Number:
CES-11-20
We quantify sources of variation in annual job earnings data collected by the Survey of Income and Program Participation (SIPP) to determine how much of the variation is the result of measurement error. Jobs reported in the SIPP are linked to jobs reported in an administrative database, the Detailed Earnings Records (DER) drawn from the Social Security Administration's Master Earnings File, a universe file of all earnings reported on W-2 tax forms. As a result of the match, each job potentially has two earnings observations per year: survey and administrative. Unlike previous validation studies, both of these earnings measures are viewed as noisy measures of some underlying true amount of annual earnings. While the existence of survey error resulting from respondent mistakes or misinterpretation is widely accepted, the idea that administrative data are also error-prone is new. Possible sources of employer reporting error, employee under-reporting of compensation such as tips, and general differences between how earnings may be reported on tax forms and in surveys, necessitates the discarding of the assumption that administrative data are a true measure of the quantity that the survey was designed to collect. In addition, errors in matching SIPP and DER jobs, a necessary task in any use of administrative data, also contribute to measurement error in both earnings variables. We begin by comparing SIPP and DER earnings for different demographic and education groups of SIPP respondents. We also calculate different measures of changes in earnings for individuals switching jobs. We estimate a standard earnings equation model using SIPP and DER earnings and compare the resulting coefficients. Finally exploiting the presence of individuals with multiple jobs and shared employers over time, we estimate an econometric model that includes random person and firm effects, a common error component shared by SIPP and DER earnings, and two independent error components that represent the variation unique to each earnings measure. We compare the variance components from this model and consider how the DER and SIPP differ across unobservable components.
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The Effect of Firm Compensation Structures on Employee Mobility and Employee Entrepreneurship of Extreme Performers
March 2010
Working Paper Number:
CES-10-06
Previous studies of employee entrepreneurship have not considered the rewards available to potential entrepreneurs inside of their current organizations. This study hopes to fill this gap by investigating how the firm's compensation structure, an important strategic decision closely scrutinized by human resource management, affects the mobility and entrepreneurship decisions of its employees, particularly those employees at the extreme ends of the performance distribution. Using a comprehensive U.S. Census data set covering all employees in the legal services industry across ten states for fifteen years, we find that high performing employees are less likely to leave firms with highly dispersed compensation structures. However, if high performers do leave employers that offer highly disperse compensation structures, they are more likely to join new firms. Less talented employees, on the other hand, are more likely to leave firms with greater pay dispersion. Unlike high performers, we find that low performers are less likely to move to new ventures when departing firms with highly disperse compensation structures.
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Who Leaves, Where to, and Why Worrry? Employee Mobility, Employee Entrepreneurship, and Effects on Source Firm Performance
September 2009
Working Paper Number:
CES-09-32
We theorize that differences in human assets' ability to generate value are linked to exit decisions and their effects on firm performance. Using linked employee-employer data from the U.S. Census Bureau on legal services, we find that employees with higher earnings are less likely to leave relative to employees with lower earnings, but if they do leave, they are more likely to move to a spin-out instead of an incumbent firm. Employee entrepreneurship has a larger adverse impact on source firm performance than moves to established firms, even controlling for observable employee quality. Findings suggest that the transfer of human capital, complementary assets, and opportunities all affect mobility decisions and their impact on source firms.
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Recent Trends in Top Income Shares in the USA: Reconciling Estimates from March CPS and IRS Tax Return Data
September 2009
Working Paper Number:
CES-09-26
Although the vast majority of US research on trends in the inequality of family income is based on public-use March Current Population Survey (CPS) data, a new wave of research based on Internal Revenue Service (IRS) tax return data reports substantially higher levels of inequality and faster growing trends. We show that these apparently inconsistent estimates can largely be reconciled once one uses internal CPS data (which better captures the top of the income distribution than public-use CPS data) and defines the income distribution in the same way. Using internal CPS data for 1967'2006, we closely match the IRS data-based estimates of top income shares reported by Piketty and Saez (2003), with the exception of the share of the top 1 percent of the distribution during 1993'2000. Our results imply that, if inequality has increased substantially since 1993, the increase is confined to income changes for those in the top 1 percent of the distribution.
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Understanding Earnings Instability: How Important are Employment Fluctuations and Job Changes?
August 2009
Working Paper Number:
CES-09-20
Using three panel datasets (the matched CPS, the SIPP, and the newly available Longitudinal Employment and Household Dynamics (LEHD) data), we examine trends in male earnings instability in recent decades. In contrast to several papers that find a recent upward trend in earnings instability using the PSID data, we find that earnings instability has been remarkably stable in the 1990s and the 2000s. We find that job changing rates remained relatively constant casting doubt on the importance of labor market 'churning.' We find some evidence that earnings instability increased among job stayers which lends credence to the view that greater reliance on incentive pay increased instability of worker pay. We also find an offsetting decrease in earnings instability among job changers due largely to declining unemployment associated with job changes. One caveat to our findings is that we focus on men who have positive earnings in two adjacent years and thus ignore men who exit the labor force or re-enter after an extended period. Preliminary investigation suggests that ignoring these transitions understates the rise in earnings instability over the past two decades.
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