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A Note on Decompositions in Fixed Effects Models in the Presence of Time-Invariant Characteristics

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Author Info

  • Heitmueller, Axel

    ()
    (Cabinet Office, UK)

Abstract

Though theoretically appealing and very popular amongst labour economists, the interpretation of the unexplained part of the Oaxaca (1973) decomposition as discrimination rather than an omitted variable problem in cross-section data has often been criticised. In this note it is shown that this problem extends also to panel data and moreover that in a fixed effects model including time invariant regressors omitted variables are a necessary and deliberate consequence. Monte Carlo simulation is used to show the extent of the bias. Special cases and practical implications are discussed.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1886.

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Length: 10 pages
Date of creation: Dec 2005
Date of revision:
Handle: RePEc:iza:izadps:dp1886

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Keywords: decomposition; fixed effects; Monte Carlo study;

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  1. J. A. Hausman & W. E. Taylor, 1980. "Panel Data and Unobservable Individual Effects," Working papers 255, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Oaxaca, Ronald, 1973. "Male-Female Wage Differentials in Urban Labor Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(3), pages 693-709, October.
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Cited by:
  1. Axel Heitmueller & Kostas G. Mavromaras, 2007. "On The Post-Unification Development Of Public And Private Pay In Germany," Manchester School, University of Manchester, vol. 75(4), pages 422-444, 07.

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