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Department of Economics, Norwegian School of Economics (NHH) Discussion Paper Series in Economics, Department of Economics, Norwegian School of Economics (NHH)

No 11/2011:
Using the Helmert-transformation to reduce dimensionality in a mixed model: Application to a wage equation with worker and firm heterogeneity.

Řivind Anti Nilsen (), Arvid Raknerud and Terje Skjerpen

Abstract: A model for matched data with two types of unobserved heterogeneity is considered — one related to the observation unit, the other to units to which the observation units are matched. One or both of the unobserved components are assumed to be random. This mixed model allows identi…cation of the e¤ect of time-invariant variables on the observation units. Applying the Helmert transformation to reduce dimensionality simpli…es the computational problem substantially. The framework has many potential applications; we apply it to wage modeling. Using Norwegian manufacturing data shows that the assumption with respect to the two types of heterogeneity a¤ects the estimate of the return to education considerably.

Keywords: High-dimensional two-way unobserved components; Matched employer-employee data; ECM-algorithm.; (follow links to similar papers)

JEL-Codes: C23; C81; J31; (follow links to similar papers)

27 pages, July 5, 2011, Revised October 4, 2011

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