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Why Do Fixed-Effects Models Perform So Poorly? The Case of Academic Salaries

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  • Daniel S. Hamermesh

Abstract

A large and growing line of research has used longitudinal data to eliminate unobservable individual effects that may bias cross-section parameter estimates. The resulting estimates, though unbiased, are generally quite imprecise. This study shows that the imprecision can arise from the measurement error that commonly exists in the data used to represent the dependent variable in these studies. The example of economists' salaries, which are administrative data free of measurement error, demonstrates that estimates based on changes in longitudinal data can be precise. The results indicate the importance of improving the measurement of the variables to which the increasingly high-powered techniques designed to analyze panel data are applied. The estimates also indicate that the payoff to citations to scholarly work is not an artifact of unmeasured individual effects that could be biasing previous estimates of the determinants of academic salaries.

Suggested Citation

  • Daniel S. Hamermesh, 1987. "Why Do Fixed-Effects Models Perform So Poorly? The Case of Academic Salaries," NBER Working Papers 2135, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2135 Note: LS
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    1. Duncan, Greg J & Stafford, Frank P, 1980. "Do Union Members Receive Compensating Wage Differentials?," American Economic Review, American Economic Association, vol. 70(3), pages 355-371, June.
    2. Freeman, Richard B, 1984. "Longitudinal Analyses of the Effects of Trade Unions," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 1-26, January.
    3. T. S. Breusch & A. R. Pagan, 1980. "The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics," Review of Economic Studies, Oxford University Press, vol. 47(1), pages 239-253.
    4. Griliches, Zvi & Hausman, Jerry A., 1986. "Errors in variables in panel data," Journal of Econometrics, Elsevier, vol. 31(1), pages 93-118, February.
    5. Lazear, Edward P, 1976. "Age, Experience, and Wage Growth," American Economic Review, American Economic Association, vol. 66(4), pages 548-558, September.
    6. Gary Solon, 1986. "Bias in Longitudinal Estimation of Wage Gaps," NBER Technical Working Papers 0058, National Bureau of Economic Research, Inc.
    7. Douglas Holtz-Eakin & Whitney K. Newey & Harvey S. Rosen, 1989. "Implementing Causality Tests with Panel Data, with an Example from LocalPublic Finance," NBER Technical Working Papers 0048, National Bureau of Economic Research, Inc.
    8. Duncan, Greg J & Hill, Daniel H, 1985. "An Investigation of the Extent and Consequences of Measurement Error in Labor-Economic Survey Data," Journal of Labor Economics, University of Chicago Press, vol. 3(4), pages 508-532, October.
    9. Charles Brown, 1980. "Equalizing Differences in the Labor Market," The Quarterly Journal of Economics, Oxford University Press, vol. 94(1), pages 113-134.
    10. Chowdhury, Gopa & Nickell, Stephen, 1985. "Hourly Earnings in the United States: Another Look at Unionization, Schooling, Sickness, and Unemployment Using PSID Data," Journal of Labor Economics, University of Chicago Press, vol. 3(1), pages 38-69, January.
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    Cited by:

    1. Ehrenberg, R.G.Ronald G., 2004. "Econometric studies of higher education," Journal of Econometrics, Elsevier, vol. 121(1-2), pages 19-37.
    2. Brown, Byron W. & Woodbury, Stephen A., 1998. "Seniority, external labor markets, and faculty pay," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(4), pages 771-798.

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