Improving the measurement of the relationship between opportunities and income: evidence from longitudinal data from Chile

Abstract

The relationship between exogenous circumstances faced in early childhood (opportunities) and earnings has been increasingly studied in the past decade. In this article we assess the sensitivity of this relationship to different income measures. Typically the empirical evidence is based on short-term income measures that suffer from variability and measurement error. Using longitudinal data from Chile, we find that when four- and seven-year earnings are used, the relationship between inequality of opportunity and income inequality is significantly higher than that obtained with yearly measures. Monte Carlo simulations with several data-generating processes confirm this result. This supports policies targeted to reduce long-term income inequality via providing equal opportunity to individuals at early stages in life.