Using the P90/P10 Ratio to Measure Inequality Trends with the Current Population Survey: A View from Inside the Census Bureau Vaults Richard V. Burkhauser Cornell University Shuaizhang Feng Shanghai University of Finance and Economics Stephen P. Jenkins University of Essex December 17, 2006 Presented at the 2006 International Symposium on Contemporary Labor Economics Xiamen, China

Past Work “Levels and Long-Term Trends in Earnings Inequality: Overcoming Current Population Survey Censoring Problems Using the GB2 Distribution” JBES Shuaizhang Feng Richard V. Burkhauser J.S. Butler

Outline of the Talk Introduction The Problem Methods Results Comparing Trends of P90/P10 with Gini Coefficients Conclusion

Introduction The practice of top coding affects earnings/income inequality trends based on public March Current Population Surveys (CPS). Previous researches have been focused primarily on Gini coefficients. (Burkhauser et al., 2004; Feng et al. 2006) No similar scrutiny has been given to the impact of censoring on percentile ratios, such as P90/P10.

Introduction The Problem Methods Results Comparing Trends of P90/P10 with Gini Coefficients Conclusion

The Problem: Censoring in Public and Internal CPS Current Population Survey (CPS) is a large household survey administered by US Census Bureau each month. March Supplements of CPS provide income information of US population about the previous year Most income inequality measures of US are based on CPS, including official releases.

The Problem: Censoring in Public and Internal CPS Public & Internal data files of the Current Population Survey Censoring occurs in both version (in the public files: top coding) Censoring occurs at each individual levels of income, not the total. Censoring (top coding) practices vary with time.

The Problem: Censoring in Public and Internal CPS Our aim is the long term trend of earnings/income inequality. However, trend based on public data is misleading (topcoding). (Levy & Murnane, 1992; Burkhauser et al. 2004) Even numbers based on Internal files are also contaminated by censoring. For Gini, Burkhauser (2004) proposed consistent topcoding, and Feng et al. (2006) proposed parametric modelling of earnings based on GB2.

The Problem: Censoring in Public and Internal CPS What about P90/P10? People have not been worrying about P90/P10 as total percentage of income values affected by topcoding is typically small (less than 10%). But, remember censoring occurs at each individual sources while we are interested in the trend of the total value.

Introduction The Problem Methods Results Comparing Trends of P90/P10 with Gini Coefficients Conclusion

Methods We are able to access to internal CPS data of U.S. Census Bureau through the New York Census Research Data Center at Cornell University. We use the P90/P10 ratios calculated from internal data to assess the impacts of public top coding on inequality trends, and as a baseline to evaluate alternative approaches to correct for this problem 7 different P90/P10 series are calculated.

Methods Public: Public-use March CPS with cell-means since [based on public data] Rule of Thumb: Public with topcodes equal to (1.5)*(top code). [based on public data] Cell-Mean: Public with topcodes with internally measured cell means. [based on internal data, but could be available to public in principal]

Methods Public Lower: Lower limit of P90/P10 based on public files. {assigning the censoring cutoff point for censored values} [based on public data] Public Upper: Upper Limit based on public files. {assigning positive infinity for censored values} [based on public data]

Methods Internal Lower: Lower limit of P90/P10 based on internal files. [based on internal data] Internal Upper: Upper Limit based on internal files. [based on internal data]

Introduction The Problem Methods Results Comparing Trends of P90/P10 with Gini Coefficients Conclusion

Results We consider three income concepts: Wages and Salaries of Full time Full year workers Total Labor Earnings of Full time Full year workers Size-adjusted Household Income

P90/P10 ratio of labor earnings Full-time, full-year (wage earnings only) public upper public lowerpublic rule of thumb cell- mean internal upper internal lower

P90/P10 ratio of labor earnings Full time, full year (total labor earnings) public upper public lowerpublic rule of thumb cell- mean internal upper internal lower

P90/P10 ratio of Household Income: ( )

Percentage of Individuals with Household Size- adjusted Income Censored in the Public File

% of Individuals Below the 90th Percentile with Censored Household Income by Income Source

Introduction The Problem Methods Results Comparing Trends of P90/P10 with Gini Coefficients Conclusion

P90/P10 vs. Gini Our preferred P90/P10 series: Cell-mean Our preferred Gini series: GB2 with public data This is the first time the two are compared with both corrected for the problem of censoring.

Long-Term Inequality Trends P90/P10 vs. Gini (wage earnings only)

Long-Term Inequality Trends P90/P10 vs. Gini (total labor earnings)

Long-Term Inequality Trends P90/P10 vs. Gini (household income)

Introduction The Problem Methods Results Comparing Trends of P90/P10 with Gini Coefficients Conclusion

Conclusions Top coding affects calculation of P90/P10 ratios, especially for household income. With consistent cell means, public-use P90/P10 ratios mirror those using internal data. P90/P10 ratios and Gini coefficients have very different long term trends.

Thank you!