Measurement Error and Earnings Dynamics: Some Estimates From the PSID Validation Study

Abstract

Previous empirical work on measurement error in survey earnings data has shown that the variance of the measurement error is roughly constant over time, it is negatively correlated with true earnings, and it is autocorrelated with previous measurement errors. This article proposes a simple model in which the measurement error stems from underreporting of transitory earnings fluctuations and a white-noise component. The model fits well to data from the Panel Study of Income Dynamics Validation Study. The results imply that autocorrelations in the changes of earnings can be estimated relatively accurately despite the presence of measurement error.