Over-Identification Tests in Earnings Functions With Fixed Effects

The fixed-effects model for panel data imposes restrictions on coefficients from regressions of all leads and lags of the dependent variable on all leads and lags of right-side variables. In the standard fixed-effects model, the omnibus goodness-of-fit statistic is shown to simplify to the degrees of freedom times the Rz from a regression of analysis of covariance residuals on all leads and lags of right-side variables. This result is applied to test models for the union-wage effect using data from the National Longitudinal Survey of Youth (NLSY). Identification and estimation of the return to schooling in models with fixed effects is also discussed. Although schooling is often treated as time-invariant, schooling increases over a five-year period for nearly 20% of continuously employed men in the NLSY The analysis of covariance estimate of the returns to schooling is precisely estimated and roughly twice as large as the ordinary least squares estimate. Unlike in the union-wage effects equation, however, ...