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

Author

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  • Heitmueller, Axel

    (Imperial College London)

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.

Suggested Citation

  • Heitmueller, Axel, 2005. "A Note on Decompositions in Fixed Effects Models in the Presence of Time-Invariant Characteristics," IZA Discussion Papers 1886, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp1886
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    References listed on IDEAS

    as
    1. Hausman, Jerry A & Taylor, William E, 1981. "Panel Data and Unobservable Individual Effects," Econometrica, Econometric Society, vol. 49(6), pages 1377-1398, November.
    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:

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    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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