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A simple method to estimate large fixed effects models applied to wage determinants

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  • Mittag, Nikolas

Abstract

Models with high-dimensional sets of fixed effects are frequently used to examine, among others, linked employer-employee data, student outcomes and migration. Estimating these models is computationally difficult because of the high-dimensional design matrix. I present a simple algorithm to compute the OLS estimates of large two-way fixed effects (TWFE) and match effect models including estimates of the fixed effects. The algorithm simplifies specification tests and variance estimation even with multi-way clustered errors. An application using German linked employer-employee data illustrates key advantages of the algorithm: Omitting match effects substantially affects estimates including the gender wage gap. Analyzing the estimated fixed effects suggest that firm fixed effects are the main channel through which job transitions drive wage dynamics, which underlines the importance of firm heterogeneity for labor market dynamics.

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  • Mittag, Nikolas, 2019. "A simple method to estimate large fixed effects models applied to wage determinants," Labour Economics, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:labeco:v:61:y:2019:i:c:s0927537119300922
    DOI: 10.1016/j.labeco.2019.101766
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    2. Suguru Otani & Tohya Sugano, 2024. "A Note on Identification of Match Fixed Effects as Interpretable Unobserved Match Affinity," Papers 2406.18913, arXiv.org, revised Aug 2024.
    3. Aquilante, Tommaso & Livio, Luca & Potoms, Tom, 2020. "On-the-job training and intra-family dynamics," Bank of England working papers 873, Bank of England.
    4. Halvarsson, Daniel & Lark, Olga & Gustavsson Tingvall, Patrik, 2022. "Foreign Ownership and Transferring of Gender Norms," Working Paper Series 1433, Research Institute of Industrial Economics.
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    7. Frings, Hanna & Kamb, Rebecca, 2022. "The relative importance of portable and non-portable agglomeration effects for the urban wage premium," Regional Science and Urban Economics, Elsevier, vol. 95(C).

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    More about this item

    Keywords

    Multi-way fixed effects; Match effects; Linked employer-employee data; Wage dynamics;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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