What Do We Really Know About Wages: The Importance of Nonreporting and Census Imputation

In the most frequently used microdata sets, over a quarter of all respondents now refuse to answer some questions about their incomes. The Census Bureau has dealt with this problem, which has been increasing in severity over time, by imputing incomes of nonrespondents. Their imputation procedure, called the "hot deck," essentially matches nonrespondents with demographically similar donors. In this paper we evaluate the census imputation methodology and raise some questions. First, the census procedure is tied to commonality of events in the population rather than the more appropriate informational content of regressors. Clearly, the census procedure severely understates income in certain occupations. Because it is based on the apparently invalid assumption that income does not affect reporting propensities, it most likely understates average incomes as well.