Education and labor market risk: Understanding the role of data cleaning

This paper examines whether conclusions about the relationship between education and labor market risk depend on the use of commonly applied procedures to clean data of extreme values. The analysis uses fifteen years of data from the Panel Study of Income Dynamics to demonstrate that conclusions about the relationship between education and labor market risk are sensitive to how extreme values of labor income are treated. The untrimmed estimates imply that college graduates experience 75% less transitory labor market risk than high school dropouts. However, applying commonly used trimming procedures results in estimates of a one standard deviation transitory labor market shock for high school dropouts being reduced by between $2700 and $4500, or 14% and 24% of annual earnings. The results demonstrate that seemingly innocuous sample selection procedures can have substantive implications.

Research highlights
► Economists have begun to examine the effect of education on the riskiness of labor income.
► This study examines whether the relationship between education and labor market risk depends on data cleaning procedures.
► The analysis shows that untrimmed estimates imply college graduates experience less transitory labor market risk.
► In contrast, trimmed estimates do not imply college graduates experience less transitory labor market risk.
► Sample selection procedures affect the education–labor income risk relationship.