Assuming dependent variable is log of wage, do we need to convert nominal wages to real wages in analyzing panel data sets when using random and fixed effects models? Is that also applicable for pooled OLS when not controlling for years?
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1$\begingroup$ "Do we need to... " for what reason? Are you asking about regression assumptions or economic theory? $\endgroup$– gungCommented Mar 24, 2015 at 19:27
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$\begingroup$ You have posted two versions of this question recently. This doesn't seem any clearer than those. Your choices include giving much more detail, so that we can be clearer what you seek. $\endgroup$– Nick CoxCommented Mar 24, 2015 at 19:52
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1$\begingroup$ Might this (I'm not sure, just suggesting the possibility) get a better answer on the Economics SE? $\endgroup$– SilverfishCommented Mar 24, 2015 at 19:56
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$\begingroup$ In case it's not clear, I am wondering whether I need to convert nominal wages to real wages when running wage equations using panel data sets. The second part of my question is whether the answer to my first question depends on what model I'm using- those being random, fixed effects and pooled OLS if not controlling for years? $\endgroup$– metrics77Commented Mar 24, 2015 at 20:00
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2$\begingroup$ The decision to use nominal or real wage data is definitely a question for Economics SE. The answer will depend on what you're trying to get at. I could imagine situations in which either price or volume data would be appropriate. $\endgroup$– Graeme WalshCommented Mar 24, 2015 at 20:18
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1 Answer
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Since the dependent variable is log-wage, I presume this is some form of earnings equation that it is estimated.
To the degree that nominal wages may be correlated with the price level (or some appropriate delfator), using the nominal wages as dependent variable, immediately requires that the (log) deflator be included as an explanatory variable in the right hand side of the equation. This some times is useful, because it essentially tests whether the coefficient attached to the deflator is equal to unity. If it appears to be so, then using the nominal wage with log-deflator in the right hand side is statistically equivalent to use the real wage.
If this coefficient does not (statistically) appear to be equal to unity, it means that, in the presence of the other variables, nominal wages do not correct fully for inflation. In such a case, it is perhaps better to use real wages, and estimates the effect of the regressors on them.
Controlling for years is an indirect way to account for inflation, usually used in hedonic price analysis.
answered Sep 6, 2015 at 23:28