# Which covariates can I include in my fixed-effects regression?

I am doing a difference-in-difference analysis of an event that affected several states in the US. I am interested to understand the effects of this event on state-level unemployment rates. I have state level data on demographics for several years before and after this event. My question is what covariates should I include if I am estimating equation of the following form:

$$\mbox{unempRate}_{jt} = \gamma_j + \alpha_t + \beta D_{jt} + \delta X_{jt} + \epsilon_{jt}$$

where $$\gamma_j$$ are state-fixed effects; $$\alpha_t$$ are time fixed effects; $$D_{jt}$$ are dummies - 1 if state $$j$$ is affected at time $$t$$, and 0 otherwise; and $$X_{jt}$$ are time-varying state level covariates. Coefficient of interest is $$\beta$$.

So far, I have included population and average household income at the state level.

What more covariates can I include? How does one decide which covariates to include in a setting like this? What is the guiding philosophy?

• Covariates should be pre-determined Commented Feb 2, 2023 at 23:00
• @Papayapap, could you clarify with some details? How does one 'pre-determine'? Commented Feb 3, 2023 at 2:00
• They should not be affected by the treatment, either measured before or invariant. Commented Feb 3, 2023 at 9:05
• Average household income could easily be argued to be affected by the treatment under the assumption that the treatment has a non-zero effect on the unemployment rate. However, variables describing the quality of the labour force could be a suggestion. Perhaps, something like average educational level, shares of education groups, degree of urbanization/labour market access variables (area of land per citizens with a road density higher than x ... or something like that). Immigrants can have a hard time achieving full labour market integration so share of certain type of immigrants. Commented Feb 3, 2023 at 23:48
• @JesperHybel, thanks. What's the general philosophy that guides the choice of a particular covariate? Trying to find a reference on this question, but no luck so far. Commented Feb 3, 2023 at 23:55