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  • Whether to include squared terms with OLS or not

    Hi all,

    I am running a regression on logged hourly pay and was wondering how to test whether I should include higher power terms of continuous variables or not. The continuous variables I have are both measured in years, experience and tenure. I have noticed it's common to include age & age squared to account for decreasing marginal returns, and was wondering if there's a way to check whether to include tenure and/or experience as squared terms too. I have plotted a two-way scatter graph between hourly & tenure then experience but can't see a clear relationship.

    Thank you for your time, I really appreciate it!


  • #2
    I would consider using a Ramsey Reset test, which is a test for misspecification of the relationship between y and the x values in the model (estatovtest after your regression). You can read about it here.

    You can also look to see what happens when you add the squared terms, ie. are they significant, what happens when you control for x2, etc. etc.

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    • #3
      Lucy:
      as an aside to Justin's helpful advice,
      Code:
      c.experience##c.experience
      is also worth testing.
      -fvvarlist- notation should be used for creating categorical variables and interactions.
      Kind regards,
      Carlo
      (Stata 18.0 SE)

      Comment


      • #4
        Thank you both so much for your help!

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