A Microlevel Latent Class Model for Measurement Error in the Consumer 

Expenditure Interview Survey October 2008 

Clyde Tucker1

 Brian Meekins1 Paul Biemer2

1 Bureau of Labor Statistics, 2 Massachusetts Ave, NE, Washington DC 20212 

2 RTI International, PO Box 12194, Research Triangle Park, NC 27709 

Abstract 

Previous research by Tucker et al. (2005) and Tucker et al. (2006) attempts to identify a latent construct that predicts 

the amount of measurement error in expenditure reports on the Consumer Expenditure Interview Survey (CEIS). 

While this work was successful in identifying a construct that predicts measurement error in expenditure reports, it is 

more sensitive to falsely negative reports of the entire purchase than it is to the underreporting of the amount of 

expenditure for that purchase. Current research focuses more deeply on the underreporting of expenditure amounts for 

a number of different commodities. Together, with previously explored indicators such as, the number of contacts, 

missing on the income question, the length of the interview, and the use of records, we examine new indicators 

describing the experience of the CU throughout the panel, resulting in a new latent construct. Although we find that 

our newly developed latent constructs have strong validity, appearing to measure report quality, it does little to explain 

either the overall level of expenditure or the difference in expenditure reports between interviews. 

Key Words: latent class model, measurement error, consumer expenditure

1. Introduction 

This work is part of a continuing effort to identify sources of measurement error in the Consumer Expenditure 

Interview Survey (CEIS), a household survey of expenditure reports of a variety of different commodity categories 

(e.g. furniture, clothing, utilities, etc.). Previous efforts have used Markov Latent Class Models to analyze patterns of 

item missing (where respondents do not report an expenditure in that category), and latent class models to identify 

characteristics of poor reporting consumer units (CUs). This work extends the work on the latter type of models by 

adding information pertaining to the experience of the consumer unit throughout all five interviews of the panel, 

developing a measure of the quality of expenditure reports with strong validity. 

2. Consumer Expenditure Survey 

The data used in this study consist of interviews collected in six years of the CEIS: 1996 through 2002. Each survey 

was designed to collect information on up to 95 percent of total CU expenditures. We define a CU as the members of a 

household who are related and/or pool their incomes to make joint expenditure decisions. In the CEIS, CUs are 

interviewed once every three months for five consecutive quarters to obtain the expenditures for 12 consecutive 

months. The initial interview for a CU is used as a bounding interview and these data are not used in the 

estimation. The survey is designed to collect data on major items of expense which respondents can be expected to 

recall for three months or longer. New panels are initiated every quarter of the year so that each quarter, 20 percent of 

the CUs are being interviewed for the first time. Only CUs completing and reporting an expense in wave 2 are used in 

this analysis, for a total of 14,877 respondents. 

3. Previous Work 

For panel surveys such as the CEIS, a related statistical method referred to as Markov latent class analysis (MLCA) is 

available, which essentially relaxes the requirement that the replicate measurements pertain to the same point. Thus, 

this method of analysis is feasible for analyzing repeated measurements of the same units at different time points 

available in panel surveys. MLCA requires a minimum of three measurements of the same units, as would be the case 

for a panel survey where units are interviewed on three occasions. The MLCA model then specifies parameters for 

both the period-to-period changes in the status of the item as well as the measurement error associated with measuring 

those changes. 
Previous work by the authors used MLCA to make aggregate estimates of underreporting in a category only by 

respondents reporting no expenditures in that category. Biemer (2000) applied the MLCA methodology to the CEIS in 

order to determine whether useful information on the magnitudes and correlates of screening question reporting error 

can be extracted directly from the CEIS panel data. Biemer and Tucker (2001) extended the earlier analysis using data 

from four consecutive quarters of the CEIS by considering CUs that were interviewed four consecutive times beginning 

in the first quarter of 1996 and ending in the last quarter of 1998. This allowed the authors to consider a wider-range of 

models including second-order Markov models. First order Markov models assume that a purchase or non-purchase at 

quarter q is affected only by quarter q-1 purchases or non-purchases. A second order Markov model assumes that both 

quarters q-1 and q-2 affect purchasing behavior at quarter q. Their analysis provided evidence of second-order Markov 

effects and recommended that second-order terms be included in the models. 

In Tucker, Biemer, and Vermunt (2002), model estimates with both unweighted and weighted data were 

compared. The results indicated that few differences were found between the two; therefore, given the ease of use, 

unweighted data were used in these analyses. A thorough examination of all explanatory variables considered in the 

previous studies was undertaken, and a reduced set of the most powerful ones was identified. A new diagnostic 

technique was developed and used to evaluate the validity of the models. In 2003, Tucker, Biemer, and Meekins 

developed methodology for estimating the amount of the missing expenditures. 

Unlike the previous work, a micro-level approach incorporating measures specific to a given interview was used by 

Tucker, Biemer, Meekins, and Shields (2004) to examine underreporting for total expenditures. A latent variable that 

adequately accounted for the shared variance among a set of observed response error indicators was created. The 

observed variables were based on information collected from each CU during the interview. The latent variable was 

believed to be a better measure of underreporting than any of the observed variables taken individually. Each CU then 

was assigned to a particular class of the latent variable representing its hypothesized level of expenditure 

underreporting based on the CUs values on the observed variables. See Tucker (1992) for an earlier empirical example. 

For this analysis the authors used only second interview data and examined reporters of expenditures while ignoring 

nonreporters. They wished to develop a model separate from covariates with only indicators of the quality of response. 

The authors began with the simplest identifiable model composed of three indicators (each with three classes) and a 

latent variable with three classes. From this point they ran all possible combinations of three indicators for a three class 

latent variable. The analysis was further extended by examining restricted models based on the hypothetical 

relationship of some of the indicators with the latent variable, thus ordering the latent classes in what we believed to be 

an interpretable manner. These “restricted” models were compared to the unrestricted models to aid in interpretability 

and choices of model fit. Some of the indicators are dichotomous. These were entered into the best three variable 

models along with other combinations to create four-indicator models. The goal was to develop a latent variable 

(preferably ordered) that indicated the quality of responses, such that poor reporters could be easily identified. 

 

Models were estimated using lEM, LCA software developed by Vermunt (1997). Model selection was based on a 

number of objective and subjective measures. The authors primarily used the Bayesian Information Criteria (BIC), the 

L2 test statistic, and the dissimilarity index. However, for each model the authors examined the conditional 

probabilities of the latent variable given each value of each indicator. In this way we assessed the relative influence of 

each indicator and the degree to which an indicator effectively differentiated the respondents with respect to the classes 

of the latent variable 

Using these methods a “best” model was selected. Latent classes aligned with expenditure means as expected. Those 

with lower expenditure means had higher levels of underreporting. For example, those in the low underreporting class 

had a total expenditure mean of $10,625, while those in the high underreporting class had a mean of $6,948 

In Tucker, Biemer, and Meekins (2005), the authors continued with a more in-depth exploration of micro-level 

measures of underreporting. In this analysis, only second wave data are used from those respondents actually reporting 

expenditures in the commodity classes under study (57,184 families interviewed in 1996 through 2001). Thus, we first 

were interested in the response errors for those respondents reporting expenditures and not those who said they had no 

expenditures in these categories. Again, the authors assumed response errors come largely in the form of underreports. 

In this case, a refined set of manifest indicators of response error were created. These indicators are listed below, with 

the coding scheme used for each: 
1. Number of contacts the interviewer made to complete the interview (1=0-2; 2=3-5; 3=6+) 

2. The ratio of respondents to total number of household members (1=<.5; 2>.5) 

3. Whether the household was missing a response on the income question (1=present; 2=missing) 

4. The type and frequency of records used. This variable indicates whether a respondent used bills or their 

checkbook to answer questions, and how often they did so. (1=never; 2=single type or sometimes; 3=multiple 

types or always) 

5. The length of the interview (1<45min; 2=45-90; 3>90) 

6. A ratio of expenditures reported for the last month of the 3 month reporting period to the total expenditures for 

the 3 months (1<.25; 2=.25-.5; 3=>.5) 

7. A combination of type of record used and the length of the interview. (1=poor; 2=fair; 3=good) as shown 

below for the combined variable. 

8. Number of expenditure questions within commodity category for which a response was imputed or allocated. 

For each of seven expenditure categories: children’s clothing, women’s clothing, men’s clothing, furniture, electricity, 

minor vehicle expenses, and kitchen accessories, we began with the simplest identifiable model composed of three 

indicators and a latent variable with three classes. Models were again estimated using lEM. Only three manifest 

variables were used to maximize cell sizes in the manifest tables. We ran all possible combinations of three indicators 

for each expenditure class. The analysis involved both “restricted” and “unrestricted” models. Restricted models 

forced a hypothesized ordering of the manifest indicators to the latent response error (ordering the latent classes in what 

we believed to be an interpretable manner), while unrestricted models did not. Based on comparisons of the results 

from restricted and unrestricted models, it was decided to proceed with only restricted models from that point. 

Combinations of four and five manifest indicators were examined, but all models with more than four variables were of 

little value. Again, we ran models with several different sets of starting values to avoid reaching only a local solution. 

. 

The selection of the best model for each expenditure category was based primarily on the BIC and the Dissimilarity 

Index. The same set of manifest indicators were not used for the best model in each case, but the statistical diagnostics 

confirm a good fit for all final models chosen. 

The authors also extended the use of substantive diagnostics used in earlier work. For each model they examined both 

conditional probabilities of the latent variable given each value of each indicator and the conditional probabilities of 

each indicator given each value of the latent variable. In addition, they also examined the actual probabilities of a case 

being in a particular latent class given its manifest cell location, as well as the proportion of cases assigned to each 

manifest cell by the latent class model. 

To gain a further understanding of the models, the authors again turned to the expenditure means for the three latent 

classes. The results, while not completely disconfirming, were not that promising. Across all seven categories of 

expenditures we analyzed, we found that the three classes of the latent variable failed to distinguish CUs based on their 

expenditures. However, for kid’s clothing, women’s clothing, and kitchen accessories, two separate groups could be 

identified that met our expectations. 

By including CUs that reported no expenditures in our analysis, the authors found that, for most commodities, mean 

expenditure amounts increased monotonically across the latent scale, and the three means were significantly different 

from one another. 

Research by Tucker, Biemer, Meekins, Kesselman (2006) advanced the effort by examining a much larger number of 

commodity categories (29) and more rigorously examining and validating the results of the latent class models. The 

“final” model for each of the 29 commodities and overall were selected in a similar manner to past research, using both 

objective statistics and subjective diagnostic tools. We then assigned CUs certain latent classes in the same way as 

previous research. Using 30 proportional odds models (each commodity category and overall) we regressed the latent 

variable on a number of demographics in order to assess the content validity of the latent variable. After finding 

similar patterns across all commodity categories and verifying the results of the latent class modeling, we examined the 

mean expenditure amounts using the commodity specific LCA models for expenditure reporters and the overall LCA 

model for all unit responders. Finally, we examined the expenditure means for each class of the latent variable 

controlling for key demographics using MANCOVAs and the contribution of the latent variable in predicting 

expenditure, controlling for demographic variables (such as you would use in weighting or nonresponse adjustment). 
Consistent with previous research the results of this research provided validation for the latent class approach to 

modeling measurement error, but a model that could differentiate levels of underreporting (given a report) remained 

elusive, while models classifying CU’s by whether they erroneously omit a report altogether were more successful. 

Other research by Meekins, Tucker, and Biemer (2008) used the latent construct developed in Tucker et al. (2006) to 

examine the relationship of measurement error to subsequent wave nonresponse and bias. It was found that those in the 

poorest category of reporting were somewhat less likely to respond in subsequent interviews, volunteered expenditure 

reports in fewer categories, and had more sharply declining overall expenditure amounts in subsequent interviews than 

their counterparts in the fair and good reporting categories. 

4. Current Research 

The current research advances this work in a number of ways. Perhaps most importantly the current work includes a 

number of new indicators that address the experience of the CU within the entire panel. In addition to the indicators 

used in previous research, the models estimated for this work include: 

 1. Number of completed interviews. 

 2. Pattern of attrition combined with the number of completed interviews (those with a pattern of attrition as 

 opposed to a sporadic nonresponse pattern were further penalized). 

 3. Average number of commodity categories for which CU had at least one expenditure report. 

 4. The number of interviews in which the third months expenditure to the quarter was between 0.25 and 0.5. 

 5. Panel averages of some of the interview level indicators. 

Model selection was conducted in a manner similar to the previous research where all combinations of three or four 

indicators were estimated and three and four level latent class variables were considered. Multiple iterations with 

random start values were used in order to avoid local maxima. Models were initially selected based on fit, reducing the 

many possible combinations of classes and indicators to a relative few candidates. The remaining candidates were then 

evaluated based on the relationship of the latent construct to the indicators and other subjective criteria. After a few 

models were selected the CU was assigned a latent class value based on the probability of being in that class given the 

indicators in the model. Expenditure means were found for each latent class assignment. The models were further 

validated by regressing demographic variables on the latent class assignment using proportional odds models. 

Expenditure means were regressed on the latent class assignment together with demographic variables. Finally, the 

authors developed a measure of “bias” calculated as follows: 







− >

≤ =

2 5 2 5

2 5

;

0; ' X X X X

X X

Bias

This measure was then regressed in a similar manner to average expenditure on the latent class assignment and 

demographic variables. 

5. Results 

Based on the aforementioned procedure three models were chosen to be verified and further analyzed. The fit statistics 

and overall performance was acceptable for all three of these models. Two models with three indicators were chosen 

and one model with four indicators was chosen. The three indicator models used the indicators: missing on income, 

length of interview, average number of commodity categories to differentiate three and four latent classes of reporting 

quality (lv2b47_3 and lv2b47_4, respectively). The four indicator model (lv2479_3) used all of those used in the three 

indicator models combined with the number of good interviews in the panel. Fit statistics were very good for all three 

models. The ordinal constraints did not significantly reduce fit of any of these three models. Table 1 shows the 

average overall expenditure per quarter by latent class and model. Note that all of the models show significant 

differences in mean expenditure across the three latent classes. 

Table 1: Average Overall Expenditure by Latent Class 
 1 2 3 4 

lv2479_3 6,946.84 8,920.20 11,985.71 

lv2b47_3 5,790.85 9,045.21 11,535.85 

lv2b47_4 5,361.99 7,802.64 8,975.91 11,535.85

Subsequent analysis regressing the latent construct on a number of demographic variables shows that the relationship 

between these demographic variables and the latent constructs are consistent and in the expected direction. The 

demographic variables explain from 17 to 15 percent of the variance in the latent classes, indicating that there is some 

independence between them. 

Table 2: Proportional Odds Model Results for Overall Expenditure 

Latent Variable 2b47_3 2b47_4 2479_3

 Exp(b) PR(X2) Exp(b) PR(X2) Exp(b) PR(X2) 

Famsize 1 0.763 <.0001 0.805 <.0001 0.756 <.0001 

Famsize 2 1.120 <.0001 1.108 <.0001 1.071 <.0001 

Age 1.018 <.0001 1.020 <.0001 1.011 <.0001 

Educ 0.895 <.0001 0.917 <.0001 0.901 <.0001 

ln(incrank/(1-incrank) 1.248 <.0001 1.220 <.0001 1.262 <.0001 

Race 1.252 <.0001 1.222 <.0001 1.246 <.0001 

Tenure 0.705 <.0001 0.746 <.0001 0.767 <.0001 

Urban 1.111 <.0001 1.090 <.0001 1.138 <.0001 

Max-rescaled R2 0.17 0.15 0.15 

Because the latent variable with four indicators proved to be better at differentiating between the quality of reporting, 

the remaining analysis is shown with the four indicator model. As is shown in Table 3, the mean expenditure amount 

for all commodity categories apart from “other vehicle expense” and “drugs“ is significantly different across the latent 

classes. 

Table 3: Mean Commodity Expenditure by Latent Class (lv2479_3) 

 Latent Class 123

Electricity 214.42 239.80 256.15

Cable 68.71 80.94 90.53

Trash 12.93 18.24 24.47

Gas 68.20 82.14 101.78

TV 55.46 91.69 152.07

Sports 15.25 27.52 51.26

Furniture 60.18 91.53 148.70

Other Household 17.32 29.74 59.80

Kitchen Accessories 15.86 28.58 59.71

Men’s Apparel 59.63 79.34 109.92

Women’s Apparel 85.48 118.95 180.62

Men’s Clothing Only 49.56 65.62 89.03

Women’s Clothing Only 73.10 100.46 151.16

Men’s Accessories 1.71 2.39 4.00

Women’s Accessories 2.32 3.62 6.44

Men’s Shoes 8.37 11.33 16.89

 Latent Class 123
Women’s Shoes 10.07 14.87 23.02

Kid’s Apparel 36.49 52.15 75.38

Kid’s Clothing Only 30.57 43.30 62.18

Kid’s Accessories 0.47 0.79 1.52

Kid’s Shoes 5.45 8.06 11.68

Minor Vehicle Repairs 37.43 53.11 81.79

Vehicle Oil 11.87 16.23 22.81

Major Vehicle Repairs 39.75 57.64 89.45

Vehicle Other* 8.98 11.91 22.25

Dental 32.38 59.50 95.10

Eyes 14.37 22.81 39.04

Drugs* 167.55 191.34 190.12

Pets 62.69 81.54 92.33

Table 4 shows the results of the average expenditure per CU per wave regressed on the latent construct controlling for 

demographics. The marginal gain from introducing the latent construct is small but statistically significant. The effect 

sizes of the demographics are not significantly diminished and the means of the expenditures by latent class controlling 

for the demographics variables in the model are significantly different and in the expected direction. These results are 

similar for each commodity category (not shown), although those commodities with higher probability of measurement 

error show more differentiation across latent classes. 

Table 4: MANCOVA Results: Total Expenditures 

 Baseline model With LV 

 Estimate p-value Estimate p-value 

 F 2740.45 <.0001 2096.07 <.0001 

 R2

 .39 .41 

F[Contribution of Latent variable]: 21.21 <.0001 

F[Contribution of Interaction Term]: 519.11 <.0001 

Total Expenditure: Least Squared Means Controlling for All Other Variables in the 

Model* 

Class Mean 

p-values for differences in LSMean 

Poor Fair Good 

Poor 6,905.96 <.01 <.01 

Fair 7,293.90 <.01 <.01 

Good 7,556.87 <.01 <.01 

*Tukey-Kramer adjustment for multiple comparisons 

Of particular note is the contribution of the interaction between income level and the latent class variable. As shown in 

Figure 1, at very high or very low incomes the relationship between latent class and reported income is much stronger. 

Indeed, the contribution of the interaction term is much higher than the direct effect of the latent construct. 
0

2000

4000

6000

8000

10000

12000

14000

16000

Poor Fair Good

1st 2nd 3rd 4th 5th

Figure 1: Latent Class by Average Expenditure by Income Rank Percentile

Turning to our measure of “bias” we see similar results. Table 5 shows summarizes the outcome of regressing the 

“bias” measure on the latent construct controlling for demographic variables. Note again the strong interaction term, 

but also how little of the variation in bias our model explains. However, the latent construct seems to differentiate 

between the poorest reporters and the other two classes. 

Table 5: MANCOVA Results: Bias 

 Baseline model With LV 

 Estimate p-value Estimate p-value 

 F 89.2 <.0001 67.8 <.0001 

 R2

 .02 .03 

F[Contribution of Latent variable]: 12.51 <.0001 

F[Contribution of Interaction Term]: 13.38 <.0001 

Total Expenditure: Least Squared Means Controlling for All Other Variables in the 

Model* 

Class Mean 

p-values for differences in LSMean 

Poor Fair Good 

Poor 1,300.67 <.01 <.01 

Fair 1,567.46 <.01 .07 

Good 1,730.65 <.01 .07 

*Tukey-Kramer adjustment for multiple comparisons 

6. Discussion 

Based on the analysis we are confident that the latent construct is indeed measuring the quality of reporting, but either 

this latent construct lacks the sensitivity needed to adequately predict underreporting, or measurement error is not a 

strong predictor of the average expenditure reported by the CU and the amount of bias, as measured by our admittedly 

coarse measure. We show differences in expenditure amounts in the expected direction. For commodity categories 

where previous research has indicated that there is a great deal of measurement error, the model seems to explain more 

of the variation in expenditure amount and bias. Finally, incorporating the latent construct in our models appears to 

enhance and clarify the effect of income on reported expenditure. All of these serve to validate the construct. 
However, although laying the groundwork for future measures, the current latent construct is probably not useful for 

adjustment as it does not explain much of the variation in expenditure or “bias.” 

 

Future research will attempt to develop indicators that may be able to further differentiate reporting quality among 

expenditure reporters. In addition, the authors intend to add a Markov component to this micro analysis, using both 

time varying and time invariant covariates to assist in predicting levels of measurement error. The goal is to eventually 

produce overall estimates of underreporting by commodity category and respondent characteristics. 

 

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