IZA DP No. 5697: Heterogeneous Income Profiles and Life-Cycle Bias in Intergenerational Mobility Estimation
published in: Journal of Human Resources, 2016, 51 (1), 239-268
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.