Luttmer, Erzo F.P. (2001). Measuring poverty dynamics and inequality in transition economies: disentangling real events from noisy data. Policy Research Working Paper no. 2549
Luttmer uses instrumental variable methods and the decomposition of income into transitory and persistent components to distinguidh underlying income inequality and changes in poverty from the effects attributable to measurement erroror transitory shocks. He applies this methodology to household-level panel data for Russia and Poland in the mid-1990s. Luttmer finds that: Accounting for noise in the data reduces inequality (as measured by the Gini coefficient) by 10-45 percent. Individuals in both countries face much economic insecurity. The median absolute annual change in income or spending is about 50 percent in Russia and about 20 percent in Poland. But roughly half of these fluctuations reflect measurement error or transitory shocks., so underlying levels of income and spending are much more stable than the data suggest. The apparent high levels of economic mobility are driven largely by transitory events and noisy data. After transitory shocks are accounted for, about 80 percent of the poor in both Russia and Poland remain in poverty for at least one year. So there is a real risk of an entrenched
Policy Research Working Paper no. 2549
Luttmer, Erzo F.P.