Elsevier

Economics Letters

Volume 82, Issue 2, February 2004, Pages 295-299
Economics Letters

Long term trends in earnings inequality: what the CPS can tell us

https://doi.org/10.1016/j.econlet.2003.08.011Get rights and content

Abstract

Changes in Current Population Survey (CPS) topcoding rules in the 1990s artificially increased measured earnings inequality. We create a time-consistent CPS data series and compare trends in earnings inequality from 1975 to 2001.

Introduction

The Census Bureau's mission is to provide policymakers and the research community with consistent information on important policy success indicators, like earnings inequality. The Current Population Survey's Annual March Demographic Supplement (CPS) is the most frequently used source of annual information on earnings and income of American households. The Census Bureau calculates official levels and trends in earnings and income inequality using these data (see Jones and Weinberg, 2000). In addition, the Census Bureau disseminates CPS data files for public-use, in which earnings and income values are topcoded. Fig. 1 reports Census Bureau derived Gini coefficients for the earnings of full-time year-round workers based on internal CPS data files, as well as our Gini coefficients based on the topcoded, public-use data files between 1975 and 2001 (survey years 1976 and 2002).

Section snippets

The problem

Improvements in CPS data collection methods and changes in the richness of the public-use data, limit the ability of researchers within and outside the Census Bureau to consistently estimate trends in earnings inequality using these data.

Over its history, the CPS has inconsistently collected and reported the total earnings of workers. For instance, between 1979 and 1984 the maximum amount that could be recorded in the internal data files for earnings in the longest job was $99,999. Beginning in

The solution

We use the public-use CPS data to derive time-consistent data for 1975–2001. We calculate the percentage of individuals subject to topcoding in every year. We determine the year in which the greatest percentage of the population is affected by the topcode and then topcode all years to yield this percentage. This procedure ensures that the same percentage of the upper tail distribution is affected in each year. In doing so we adjust the topcodes used for each of the subcomponents of earnings in

Results

Our time-consistent topcode affects 1.3% of wage and salary earners, 3.6% of the self-employed and 2.0% of farmers in each year. (Since the effective topcodes have been less restrictive in the internal CPS data, our procedure would affect an even smaller share of the population.) Fig. 1 shows Gini coefficients derived from our time-consistent public-use data. In this series, there is no spike in earnings inequality in either 1993 or 1995.

We use regression analysis to test whether our

Conclusions

Researchers must be cautious when making inferences about trends in earnings inequality derived from public-use CPS data. The same caution holds for inferences about income inequality trends, since earnings comprise the largest component of income. Important changes in the effective topcodes in both the internal and public-use CPS data series have resulted in yearly data that are not comparable over the 1990s. We impose a time-consistent topcoding rule on the public-use data and find trends in

Acknowledgements

Partial funding for the work reported in this paper came from the United States Department of Education, National Institute of Disability and Rehabilitation Research, cooperative agreement No. 1331390038. This paper does not necessarily reflect the views of the National Institute of Disability and Rehabilitation Research. We thank Mary Daly for comments on this work.

References (5)

  • Burkhauser, R.V., Butler, J.S., Feng, S., Houtenville, A.J. (2003). Data Appendix: Long Term Trends in Earnings...
  • A.F. Jones et al.

    The changing shape of the nation's income distribution

    Current Population Reports, June

    (2000)
There are more references available in the full text version of this article.

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