Using the Pareto Distribution to Improve Estimates of Topcoded Earnings

Philip Armour, Richard V. Burkhauser, Jeff Larrimore

NBER Working Paper No. 19846
Issued in January 2014
NBER Program(s):   LS   PE   TWP

Inconsistent censoring in the public-use March CPS limits its usefulness in measuring labor earnings trends, as previous approaches for imputing topcoded earnings systematically understate top earnings. Using Pareto estimation methods with less-censored internal data, we create an enhanced cell-mean series to capture top earnings in the public-use data. Annual earnings inequality trends since 1963 using our series largely mirror those found by Kopczuk, Saez, and Song (2010) using Social Security Administration data for Commerce and Industry workers. When we extend our analysis to 2013 and consider all workers, earnings inequality levels are higher but its growth is more modest.

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This paper was revised on July 7, 2015

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Document Object Identifier (DOI): 10.3386/w19846

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