Year fixed effects

[Theo Jansen]

Hi all,

I am seeking for explanation on year fixed effects, why one would need them as a control in a panel data regression.
I searched a lot on the internet and besides definitions I cannot get clear why I need them or what they exactly do in the regression model.

Is it only to control for factors that are constant throughout the different years in the used sample, or is it more?

Kind regards,
Theo

[Carlo Lazzaro]

Theo:
under -xtreg,fe- for instance, -i.year- gives the contribution of time (adjusted for the remaining predictors) to explain variation of the regressand within the same panel.
You can test whether -i.year- is jointky statistical significant via -testparm-:

. use "http://www.stata-press.com/data/r16/nlswork.dta"
(National Longitudinal Survey.  Young Women 14-26 years of age in 1968)

. xtreg ln_wage age i.year,fe

Fixed-effects (within) regression               Number of obs     =     28,510
Group variable: idcode                          Number of groups  =      4,710

R-sq:                                           Obs per group:
     within  = 0.1060                                         min =          1
     between = 0.0914                                         avg =        6.1
     overall = 0.0805                                         max =         15

                                                F(15,23785)       =     188.00
corr(u_i, Xb)  = 0.0467                         Prob > F          =     0.0000

------------------------------------------------------------------------------
     ln_wage |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]
-------------+----------------------------------------------------------------
         age |   .0125992   .0102163     1.23   0.217    -.0074253    .0326238
             |
        year |
         69  |   .0748621   .0159011     4.71   0.000      .043695    .1060292
         70  |   .0478697   .0235673     2.03   0.042     .0016763     .094063
         71  |   .0865577   .0327939     2.64   0.008     .0222795     .150836
         72  |   .0856757   .0424903     2.02   0.044     .0023919    .1689594
         73  |   .0880069    .052344     1.68   0.093    -.0145906    .1906044
         75  |   .0778607   .0720304     1.08   0.280    -.0633235    .2190449
         77  |    .108365   .0922272     1.17   0.240    -.0724063    .2891363
         78  |   .1309518   .1028143     1.27   0.203    -.0705707    .3324743
         80  |   .1142649    .122792     0.93   0.352    -.1264152     .354945
         82  |   .1090451   .1431112     0.76   0.446    -.1714619    .3895522
         83  |   .1211272   .1532018     0.79   0.429    -.1791581    .4214125
         85  |   .1465637   .1736146     0.84   0.399    -.1937321    .4868594
         87  |   .1382642   .1941163     0.71   0.476     -.242216    .5187445
         88  |   .1799741   .2079871     0.87   0.387    -.2276938     .587642
             |
       _cons |   1.203731   .1952306     6.17   0.000     .8210667    1.586396
-------------+----------------------------------------------------------------
     sigma_u |   .4058746
     sigma_e |  .30300411
         rho |  .64212421   (fraction of variance due to u_i)
------------------------------------------------------------------------------
F test that all u_i=0: F(4709, 23785) = 8.80                 Prob > F = 0.0000

. testparm(i.year)

 ( 1)  69.year = 0
 ( 2)  70.year = 0
 ( 3)  71.year = 0
 ( 4)  72.year = 0
 ( 5)  73.year = 0
 ( 6)  75.year = 0
 ( 7)  77.year = 0
 ( 8)  78.year = 0
 ( 9)  80.year = 0
 (10)  82.year = 0
 (11)  83.year = 0
 (12)  85.year = 0
 (13)  87.year = 0
 (14)  88.year = 0

       F( 14, 23785) =    6.50
            Prob > F =    0.0000

.

[Theo Jansen]

Hi Carlo,

Thanks for this!

So do I include year fixed effects in the model to control for factors that are attributable to the years (and not to the relationship between x and y that I want to test)?
I cannot get it clear for me (in basic language) what year fixed effects control for and what they do or why I need them...

[Carlo Lazzaro]

Theo:
the main issue is checking whether or not time elapses with any effect on the regressand (within the same panel under the -fe- specification).

[Theo Jansen]

Hi Carlo,

So if I understand it correctly, by including the year fixed effects in the equation (xtreg dep. var ind. var cv1 cv2 cv3 i.fyear, fe) you control for the effects of the years on the relationship between x and y?

[Carlo Lazzaro]

Yes.