Sample Essay On Structural Break On The Average Income Of The Middle Sixty

Introduction

This paper will be about the analysis of structural breaks on the data from the World Top Income Database. The data is a time series of the Lowest 20%, Middle 60%, and the Top 20% incomes in the world. Specifically, this paper will be concerned on the Middle 60% where it can be seen that the trend on the average after-tax income changed in 1997.

Presentation of Data

In the data, the Middle 60% income reached a low 43033 in 1996 from an unsteady decrease since 1976 as can be seen in figure 1.
The decrease came from a high of 49533 to a low of 43033 and increased to a high of 53500. From figure 1, it can be seen that there is a significant structural break in 1997 where the trend of steady decrease changed to an increase in average after-tax income. To represent the said increase and decrease, regression lines are included in the graph as can be seen in figure 2.
The best fit line from 1976 to 2011 does not quite represent the data, while the two regression lines divided by the break represents the two group better. RLb has an intercept of 652702.7 and a slope of -305.3 while RLa has an intercept of -1444990.8 and a slope of 745.7. The data has an F statistic of 154.4139 where the 95% confidence interval is at 3.294537 and p-value which is zero.

Conclusion

Using a basic Chow test, it can be seen in the coefficients of RLb and RLa that they are significantly different. This shows a structural break on the data. The F test also presents that the main regression line does not fit the data, an indication that there is a structural break on the data. The two segments that are divided in the year 1997 showed a better representation for the data.