Earnings Mobility and Measurement Error: A Pseudo-Panel Approach

The degree of mobility in incomes is often seen as an important measure of the equality of opportunity in a society and of the flexibility and freedom of its labor market. However, estimation of mobility using panel data is biased by the presence of measurement error and nonrandom attrition from the panel. This study shows that dynamic pseudo-panel methods can be used to consistently estimate measures of absolute and conditional mobility when genuine panels are not available and in the presence of nonclassical measurement errors. These methods are applied to data on earnings from a Mexican quarterly rotating panel. Absolute mobility in earnings is found to be very low in Mexico, suggesting that the high level of inequality found in the cross-section will persist over time. However, the study finds conditional mobility to be high, so that households are able to recover quickly from earnings shocks. These findings suggest a role for policies that address underlying inequalities in earnings opportunities.