Econometrica: Nov, 1986, Volume 54, Issue 6
Reporting Errors and Labor Market Dynamics
James M. Poterba, Lawrence H. Summers
This paper estimates the incidence of response errors in the Current Population Survey. It proposes a procedure for adjusting the Bureau of Labor Statistics' gross flows data on labor market transitions to account for these errors. Although the findings are not definitive because the procedure makes particular assumptions regarding the stochastic process generating response errors, they illustrate the potentially substantial effect of response errors on studies of labor market behavior. The adjustment procedure suggests that because measurement errors give rise to spurious transitions between labor market states, the labor market may be less dynamic than previously thought. The results imply that conventional measures may understate the duration of unemployment by as much as eighty per cent, and overstate the frequency of labor force entry and exit by even more.