Heritability and social interaction in labor market outcomes: Evidence from the population of twins in the United States.

Abstract

We use data on 44,000 twin pairs observed as adolescents in the 2000 Census, linked to their earnings 20 y later, to study the heritability of labor market outcomes. We extend the Classical Twins Design (CTD), which identifies heritability from contrasts between monozygotic and dizygotic twins, to settings where an analyst does not observe zygosity but can measure outcomes for same-sex and opposite-sex twins. We also allow for the presence of a family- and sex-specific component affecting same-sex siblings but only partly shared by opposite-sex siblings. Our extended model identifies heritability from the difference-in-differences of same-sex vs. opposite-sex twins vs. siblings. The estimates indicate strong heritability (h-sq = 0.36) of log earnings. Using an AKM [J. M. Abowd <i>et al.</i>, <i>Econometrica</i> <b>67</b>, 251-333 (1999)] decomposition that separates the person-specific component of earnings from employer-specific pay premiums, we find that both components are heritable. The heritability of employer pay premiums, however, is mainly driven by same-sex twins who work at the same firm, suggesting that social interactions may lead to an overestimate of the genetic component in earnings. Excluding siblings who work together leads to estimates of the heritability of log earnings that are 15% lower. Similar biases may be present in CTD-based estimates of heritability for other social outcomes like education.