A note on decompositions in fixed effects models in the presence of time-invariant characteristics

A note on decompositions in fixed effects models in the presence of time-invariant characteristics

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"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"--Forschungsinstitut zur Zukunft der Arbeit web site.

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