Two-Sample Two-Stage Least Squares (TSTSLS) Estimates of Earnings Mobility: How Consistent are They?

Abstract

Academics and policymakers have shown great interest in cross-national comparisons of intergenerational earnings mobility. However, producing consistent and comparable estimates of earnings mobility is not a trivial task. In most countries researchers are unable to observe earnings information for two generations. They are thus forced to rely upon imputed data instead. This paper builds upon previous work by considering the consistency of the intergenerational correlation (ρ) as well as the elasticity (β), how this changes when using a range of different instrumental (imputer) variables, and highlighting an important but infrequently discussed measurement issue. Our key finding is that, while TSTSLS estimates of β and ρ are both likely to be inconsistent, the magnitude of this problem is much greater for the former than it is for the latter. We conclude by offering advice on estimating earnings mobility using this methodology.

Keywords: Earnings mobility, two sample two stage least squares

JEL Classification: I20, I21, I28