Working Paper: NBER ID: w18384
Authors: Jrnsteffen Pischke; Hannes Schwandt
Abstract: Many literatures investigate the causal impact of income on economic outcomes, for example in the context of intergenerational transmission or well-being and health. Some studies have proposed to use employer wage differentials and in particular industry affiliation as an instrument for income. We demonstrate that industry affiliation is correlated with fixed individual characteristics, specifically parents' education and own height, conditional on the covariates typically controlled for in these studies. These results suggest that there is selection into industries based on unobservables. As a result the exclusion restriction in many IV studies of this type is likely violated.
Keywords: income; happiness; health; industry affiliation; instrumental variable
JEL Codes: D31; I14; I3; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| industry affiliation (L89) | selection bias (C24) |
| industry affiliation (L89) | income levels (J31) |
| income levels (J31) | happiness (I31) |
| income levels (J31) | health (I19) |
| maternal education (I24) | IV estimates of income on happiness (D31) |
| height (Y60) | health (I19) |