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

Axel Heitmueller
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Axel Heitmueller: Imperial College London

No 1886, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: decomposition; fixed effects; Monte Carlo study (search for similar items in EconPapers)
JEL-codes: C1 C33 (search for similar items in EconPapers)
Pages: 10 pages
Date: 2005-12
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (6)

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