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- From 1968 to 1997, the survey was yearly. After 1997, it started having a biennial structure. We only consider the SRC or core subsample because the SEO oversamples the poor. After dropping the SEO and Latino samples we are left with a random sample, which makes computations simpler since weights are not needed (Haider, 2001) 21 .
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- Namely, before the 1976 wave we construct it by subtracting head+wife taxable income (which includes asset income) from total family income and then adding back earnings for the head and the wife. Between 1976 and 1983, we construct it by subtracting asset income of head and wife from total family income. Asset income is formed of farm income, business income, rent and interests, with the addition of gardening and roomers income (from 1978).
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Tauchen, George (1986), ‘Finite state markov-chain approximations to univariate and vector autoregressions’, Economic Letters 20(2), 177–181. A Appendix: PSID data A.1 The PSID The Panel Study of Income Dynamics (PSID) follows a large number of U.S. households over time and reports information about their demographic characteristics and sources of income. The PSID was initially composed of two major subsamples. The first of them, the SRC (Survey Research Center) or core subsample, was designed to be representative of the U.S. population and is a random sample itself. The second, the SEO (Survey of Economic Opportunity) subsample, was created to study the characteristics of the most deprived households. Later, Immigrant and Latino subsamples were also added to the PSID.
- To finally implement the Arellano et al. (2017) procedure, we create a sample with all sets of subsequent three-year observations (without replacement: once an observation in the PSID sample is in a 3-year set in our sample we drop it). This implies that we are also dropping all of those households that do not have three consecutive valid income observations in the PSID.
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- Unlike many other papers, but similarly to Krueger, Mitman and Perri (2016) we consider all households, whether or not male-headed. We do not impose any restrictions regarding e.g. family composition or its changes, as we consider that, once we have properly equivalized earnings, all remaining changes due to family composition shocks are also possible sources of income risk that we wish to capture.
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- We deflate values to 2013 dollars, and only keep observations above $1500. This is also in accordance with standard practice in the literature, where observations below a minimum earnings threshold are dropped (De Nardi (2004) or Guvenen et al. (2016), for instance). A.3 Income definition Our main income definition is post-tax equivalized household earnings. We obtain it by computing nonfinancial household earnings in the PSID, estimating and using a tax function to predict post-tax earnings, and finally running a regression on the number of family members for the purposes of equivalization.
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