Classification and Aggregation: An Application to Industrial Classification in CPS Data

In this paper the authors offer a method for deciding how to aggregate a set of elementary industries. The method is then applied to the problem of estimating a wage equation that allows for industry-specific effects. Their method explicitly formalizes the trade-off between goodness-of-fit and parsimony implicit in an aggregation problem. By varying the parameter of the assumed loss function, one obtains a whole sequence of aggregation levels. Further, the resulting sequence is consistent; that is, groupings formed at one level of aggregation will never be undone when one aggregates further. Copyright 1992 by John Wiley & Sons, Ltd.