A Note on the Importance of Normalizations in Dynamic Latent Factor Models of Skill Formation

32 Pages Posted: 21 Sep 2020

See all articles by Emilia Del Bono

Emilia Del Bono

Institute for Social and Economic Research; IZA Institute of Labor Economics

Josh Kinsler

University of Georgia

Ronni Pavan

University of Chicago - Department of Economics

Abstract

In this paper we highlight an important property of the translog production function for the identification of treatment effects in a model of latent skill formation. We show that when using a translog specification of the skill technology, properly anchored treatment effect estimates are invariant to any location and scale normalizations of the underlying measures. By contrast, when researchers assume a CES production function and impose standard location and scale normalizations, the resulting treatment effect estimates are biased. Interestingly, the CES technology with standard normalizations yields biased treatment effect estimates even when age-invariant measures of the skills are available. We theoretically prove the normalization invariance of the translog production function and then produce several simulations illustrating the effects of location and scale normalizations for different technologies and types of skills measures.

Keywords: children, human capital, dynamic factor analysis, measurement, policy

JEL Classification: C13, C18, I38, J13, J24

Suggested Citation

Del Bono, Emilia and Kinsler, Josh and Pavan, Ronni, A Note on the Importance of Normalizations in Dynamic Latent Factor Models of Skill Formation. IZA Discussion Paper No. 13714, Available at SSRN: https://ssrn.com/abstract=3695415

Emilia Del Bono (Contact Author)

Institute for Social and Economic Research ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

HOME PAGE: http://www.iser.essex.ac.uk/staff/staff-details.php?personID=678

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Josh Kinsler

University of Georgia ( email )

Ronni Pavan

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

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