Errors in Self-Reported Earnings:The Role of Previous Earnings Volatility

I report the measurement error in self-reported earnings for a developing country.Administrative data from the Federated States of Micronesia`s (FSM) Social Security officeare matched to the FSM Census data for the wage sector employed. I find that the error inannual self-reported earnings is centered on zero but less efficient than results from the US.Additionally the error is not classical in nature - I find evidence for mean reversion in thedata. Using previous annual earnings history contained in the FSM Social Security data, Iconstruct accurate measures of past deviations of administratively recorded earnings toidentify the impact of transitory income on current reporting of earnings. Prior earningsvolatility is an important determinant of the error in earnings for the current period. However,the effect of prior shocks diminish significantly over time - suggesting that information ontransitory income shocks will be helpful in evaluating the usefulness of self-reported earningsmeasures in applied work...