Volume 30, Number 1 (Winter) 1995
McGarry, Kathleen. 1995. "Measurement Error and the Poverty Rates of Widows." Journal of Human Resources 30(1):113-134.
Estimates of the poverty rate and of the probability of entering or existing poverty are biased when income is observed with error. I estimate a variance components model of income which contains a white noise error term and then treat this component as an approximation of the error in observed income. By comparing poverty rates calculated with and without this estimated measurement error, I conclude that observation error causes the poverty rate to be overestimated around two percentage points on average. However, eliminating observation error substantially reduces the probability of transiting either into or out of poverty. These reductions imply that the amount of permanent poverty is underestimated when measurement error is ignored.
The author is an assistant professor of economics at the University of California, Los Angeles. She would like to thank James N. Brown, Michael D. Hurd and Audrey Light for their helpful comments. The data used in this article can be obtained beginning July 1995 through July 1998 from the author at the Department of Economics, University of California, Los Angeles, Los Angeles, CA 90024-1477.
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