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Measurement Error in Human Capital and the Black-White Wage Gap

Proxy variables are frequently used in economics to control for unavailable variables in a linear regression setting. For example, AFQT scores have been used to control for human capital accumulation in measuring black-white wage differentials. This practice may bias the coefficient estimates for th...

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Bibliographic Details
Published in:The review of economics and statistics 2003-08, Vol.85 (3), p.578-585
Main Author: Bollinger, Christopher R.
Format: Article
Language:English
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Summary:Proxy variables are frequently used in economics to control for unavailable variables in a linear regression setting. For example, AFQT scores have been used to control for human capital accumulation in measuring black-white wage differentials. This practice may bias the coefficient estimates for the correctly measured variables as well. This paper models proxy variables as a measurement error process and derives bounds for the coefficients on the correctly measured variables under a variety of assumptions. The results show that the coefficient on race in a linear regression is an overstatement of the actual black-white wage gap. Sensitivity analysis suggests that if human capital could be correctly measured it would be unlikely that the coefficient on black would be negative.
ISSN:0034-6535
1530-9142
DOI:10.1162/003465303322369731