The Intergenerational Persistence of Lifetime Earnings

This paper proposes a new method for estimating the intergenerational persistence of lifetime earnings from data that contain only short sections of individual earnings histories. The approach infers lifetime earnings persistence from the persistence of short earnings averages together with information about the stochastic process governing individual earnings. I …nd that lifetime earnings are substantially more persistent than estimates of average earnings persistence suggest. Regressing sons’ on fathers’ log lifetime earnings yields a coe¢ cient of 0.54. Proxying for lifetime earnings using …ve year earnings averages implies a coe¢ cient of only 0.37 and hence a bias of one-third. The bias is much stronger, if observations with zero earnings are not excluded from the sample. These …ndings are robust against alternative assumptions about the data generating process for earnings. JEL: J62