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When Can We Work in Embedding Space? What Text Embeddings Preserve

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  • Simon Freyaldenhoven

Abstract

When do text embeddings work as inputs to empirical analysis? Their use rests on an assumption: that we can trade text for its low-dimensional embedding, and lose little in doing so. I make that assumption precise under a generative model in which documents are mixtures of latent topics. I study two uses---clustering units in embedding space and controlling for high-dimensional text. A cluster of embeddings is a set of documents with similar topic mixtures; controlling for the embedding is equivalent to controlling for the topic mixture, so validity reduces to whether that mixture captures the confounding. In an application to 363 U.S. metropolitan areas, embedding-based clusters of LLM-generated economic descriptions recover interpretable economic archetypes and separate local employment dynamics more sharply than clustering on model residuals, or on a curated set of industry and demographic covariates.

Suggested Citation

  • Simon Freyaldenhoven, 2026. "When Can We Work in Embedding Space? What Text Embeddings Preserve," Papers 2608.31059, arXiv.org.
  • Handle: RePEc:arx:papers:2608.31059
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    References listed on IDEAS

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    1. Simon Freyaldenhoven & Shikun Ke & Dingyi Li & Jose Luis Montiel Olea, 2025. "On the Testability of the Anchor-Words Assumption in Topic Models," Working Papers 25-14, Federal Reserve Bank of Philadelphia.
    2. Margaret E. Roberts & Brandon M. Stewart & Richard A. Nielsen, 2020. "Adjusting for Confounding with Text Matching," American Journal of Political Science, John Wiley & Sons, vol. 64(4), pages 887-903, October.
    3. Daniel D. Lee & H. Sebastian Seung, 1999. "Learning the parts of objects by non-negative matrix factorization," Nature, Nature, vol. 401(6755), pages 788-791, October.
    4. Sara Casella & Jesús Fernández-Villaverde & Stephen Hansen & Ryohei Oishi & Minchul Shin, 2026. "Structural Estimation with Unstructured Data," NBER Working Papers 35487, National Bureau of Economic Research, Inc.
    5. Bajari, P. & Cen, Z. & Chernozhukov, V. & Manukonda, M. & Vijaykumar, S. & Wang, J. & Huerta, R. & Li, J. & Leng, L. & Monokroussos, G. & Wang, S., 2025. "Hedonic prices and quality adjusted price indices powered by AI," Journal of Econometrics, Elsevier, vol. 251(C).
    6. Laura Battaglia & Timothy Christensen & Stephen Hansen & Szymon Sacher, 2024. "Inference for Regression with Variables Generated by AI or Machine Learning," Papers 2402.15585, arXiv.org, revised Apr 2025.
    7. Timothy Christensen & Giovanni Compiani, 2026. "From Unstructured Data to Demand Counterfactuals: Theory and Practice," Cowles Foundation Discussion Papers 2542, Cowles Foundation for Research in Economics, Yale University.
    8. Timothy Christensen & Giovanni Compiani, 2026. "From Unstructured Data to Demand Counterfactuals: Theory and Practice," Papers 2601.05374, arXiv.org, revised Jun 2026.
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