EVIDENCE ON THE VALIDITY OF CROSS-SECTIONAL AND LONGITUDINAL LABOR-MARKET DATA

This article investigates error properties of survey reports of labor market variables. We use the Panel Study of Income Dynamics (PSID) Validation Study, a two-wave panel survey of workers employed by a large firm that shared its detailed payroll records. Individuals' reports of annual earnings are fairly accurate. Errors are negatively related to true earnings, reducing bias due to measurement error when earnings are used as an independent variable. Biases are moderately larger for changes in earnings. Earnings per hour are less reliably reported than annual earnings. Biases in estimating earnings functions are relatively small, but those in labor supply functions may be important.