Using the Pareto Distribution to Improve Estimates of Topcoded Earnings

Published in: Economic Inquiry, v. 54, no. 2, Apr. 2016, p. 1263-1273

Posted on RAND.org on November 04, 2016

by Philip Armour, Richard V. Burkhauser, Jeff Larrimore

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Inconsistent censoring in the public-use March Current Population Survey (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 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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