The Extent of Measurement Error in Longitudinal Earnings Data: Do Two Wrongs Make a Right?

Abstract

This paper examines the properties and prevalence of measurement error in longitudinal earnings data. The analysis compares Current Population Survey data to administrative Social Security payroll tax records for a sample of heads of households over two years. In contrast to the typically assumed properties of measurement error, the results indicate that errors are serially correlated over two years and negatively correlated with true earnings (i.e., mean reverting). Moreover, reported earnings are more reliable for females than males. Overall, the ratio of the variance of the signal to the total variance is .82 for men and .92 for women. These ratios fall to .65 and .81 when the data are specified in first-differences. The estimates suggest that longitudinal earnings data may be more reliable than previously believed.