Estimation and Testing of Fixed Effect Models: Estimating the Union Wage Effect Using Panel Data

Abstract

This paper presents estimates of the union wage effect while controlling for person specific unmeasured variables which do not change over time (‘fixed effects‘) as well as specification tests for the person effect models commonly in use. a sample of men from the PSID, we find that controlling for a person effect POSUH in estimates of the union wage effect on the order of 5-81, as opposed to 201 in the cross section. An omnibus test based on an unrestricted reduced form and an instrumental variables test based on a differencing idea provide no evidence against the conventional model. A third test, based on a comparison of those who enter and leave union coverage, does provide evidence against the usual model.