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A cautionary note on using industry affiliation to predict income


Pischke, Jörn-Steffen; Schwandt, Hannes (2012). A cautionary note on using industry affiliation to predict income. NBER Working Papers 18384.

Abstract

Many literatures investigate the causal impact of income on economic outcomes, for example in the context of intergenerational transmission or well-being and health. Some studies have proposed to use employer wage differentials and in particular industry affiliation as an instrument for income. We demonstrate that industry affiliation is correlated with fixed individual characteristics, specifically parents' education and own height, conditional on the covariates typically controlled for in these studies. These results suggest that there is selection into industries based on unobservables. As a result the exclusion restriction in many IV studies of this type is likely violated.

Abstract

Many literatures investigate the causal impact of income on economic outcomes, for example in the context of intergenerational transmission or well-being and health. Some studies have proposed to use employer wage differentials and in particular industry affiliation as an instrument for income. We demonstrate that industry affiliation is correlated with fixed individual characteristics, specifically parents' education and own height, conditional on the covariates typically controlled for in these studies. These results suggest that there is selection into industries based on unobservables. As a result the exclusion restriction in many IV studies of this type is likely violated.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:D31, I14, I3, J31
Language:English
Date:September 2012
Deposited On:18 Aug 2017 11:41
Last Modified:29 Jul 2018 04:05
Series Name:NBER Working Papers
OA Status:Closed
Publisher DOI:https://doi.org/10.3386/w18384

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