SEM Concepts

Structural Equation Modeling Concepts
University Press Scholarship Online
Oxford Scholarship Online
Structural Equation Modeling

Natasha K. Bowen and Shenyang Guo
Print publication date: 2011

Print ISBN-13: 9780195367621
Published to Oxford Scholarship Online: January 2012
DOI: 10.1093/acprof:oso/9780195367621.001.0001

Natasha K. Bowen
Shenyang Guo
DOI:10.1093/acprof:oso/9780195367621.003.0002
Abstract and Keywords

This chapter discusses a number of theoretical and statistical concepts and
principles that are central to SEM. It introduces SEM notation and equations in
the context of more familiar graphics and terminology. It explains the role of
matrices in SEM analyses.
Keywords: structural equation modeling, SEM, social work research, SEM notation, equations
In this chapter we discuss in detail a number of theoretical and statistical

concepts and principles that are central to SEM. SEM notation and equations
are introduced in the context of more familiar graphics and terminology. The
role of matrices in SEM analyses is explained. The material in this chapter is
essential to understanding the more detailed treatment of topics in later
chapters, but later chapters also reinforce and help illustrate concepts
introduced here. Iacobucci (2009) also provides a complementary and
instructive summary of SEM notation and its relationship to the matrices. For
more in-depth information on basic statistical concepts, refer to a social science
statistics text (e.g., Cohen & Cohen, 1983; Pagano, 1994; Rosenthal, 2001). More
advanced treatment of the statistical foundations of SEM can be found in Bollen
(1989), Long (1983), and Kaplan (2009), and among other SEM texts in the
reference list.
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Latent Versus Observed Variables

Latent variable is a central concept in SEM. Latent variables are measures of
hidden or unobserved phenomena and theoretical constructs. In social (p.17)
work, latent variables represent complex social and psychological phenomena,
such as attitudes, social relationships, or emotions, which are best measured
with multiple observed items. Many terms for latent variables are encountered
in the SEM literature, for example, factors, constructs, measures, or dimensions.
In contrast, observed variables are variables that exist in a database or
spreadsheet. They are variables whose raw scores for sample members can be
seen, or observed, in a dataset. Observed variables may comprise scores from
survey items or interview questions, or they may have been computed from
other variables (e.g., a dichotomous income variable obtained by categorizing a
continuous measure of income). Individual observed variables may be called
items, indicators, manifest items, variables, questionnaire items, measures, or
other terms in different sources. The observed items that measure latent
variables may collectively be called a scale, subscale, instrument, measure,
questionnaire, etc. The use of terms is not always consistent. The main point,
however, is that observed variables come from raw data in data files. We’ll see
later that the actual input data for SEM is usually the covariance matrix derived
from a set of indicators.
We follow Bollen (1989) in making a critical distinction between the terms scale
and index. Note that this distinction is not made consistently in the literature!
The latent variable modeling that is the subject of this book specifically involves
scales, which in our conceptualization, are used to measure unobserved
phenomena that “cause” scores on multiple, correlated indicators (Bollen). An
underlying workplace climate will “cause” employees to respond in a generally
negative or positive way to a set of indicators on a workplace support scale. In
contrast, indicators of indices “cause” scores on the index and are not
necessarily highly correlated. Checking off items on a list (index or inventory) of
life stressors, for example, might lead to an individual’s high score on the index,
but experiencing the “death of a close family member,” “trouble with boss,” or
“pregnancy” are not necessarily or on average correlated or “caused” by some
underlying phenomenon (Holmes & Rahe, 1967). Scores on indices are not
driven by latent phenomena so are not of interest here.
The distinction made between latent and observed variables represents a

fundamental difference between SEM and conventional regression modeling. In
the SEM framework, latent variables are of interest but cannot be directly
measured. Observed variables are modeled as functions of model-specific latent
constructs and latent measurement errors. (p.18) In this framework,
researchers are able to isolate “true” causes of scores and variations in scores
due to irrelevant causes. Tests of relationships among the resulting latent
variables are therefore superior to tests among variables containing irrelevant
variance (i.e., error variance).
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As we have described, latent variables are measured indirectly through multiple

observed variables. Researchers (Glisson, Hemmelgarn, & Post, 2002), for
example, examined the quality of a 48-item instrument called the Shortform
Assessment for Children (SAC) as a measure of “overall mental health and
psychosocial functioning” (p. 82). The instrument includes 48 items, 24 of which
are hypothesized to represent an internalizing dimension or factor, and 24 of
which represent an externalizing dimension of mental health and psychosocial
functioning. The internalizing items relate to affect, psychosomatic complaints,
and social engagement. In this example, internalizing behavior is a latent
(hidden, unobservable) phenomenon with a continuum of values. Each person is
believed to have a “true” but unknowable score on a continuum of internalizing
behavior. This internal personal “truth” is believed to largely determine each
person’s scores on the set of direct questions about emotion, psychosomatic
complaints, and social engagement. Observed scores derived from responses to
the instrument’s questions are expected to be correlated with each other
because they are all caused by each respondent’s true, unobservable
internalizing status. Similarly, in the study by Bride et al. (2004), social workers’
differing experiences with the latent phenomenon “indirect trauma” were
expected to influence their responses to the 17 items on the STSS. Scores on the
items are expected to be correlated with each other and with the latent variable
because they are “caused” by the same experience. If a worker’s exposure to
indirect trauma has been low, responses to all 17 items are expected to reflect
that level of exposure. Overall and in general, if a worker’s exposure to indirect
trauma is high, his or her scores on all items should reflect that reality.
Latent constructs also apply to characteristics of organizations. In a study of

turnover among employees of child welfare agencies, for example, researchers
(McGowan, Auerbach, & Strolin-Goltzman, 2009) describe constructs such as
“clarity and coherence of practice,” “technology, training, and record keeping,”
and “job supports and relationships.” In another study using SEM, Jang (2009)
also used measures of workplace characteristics, for example, “perceived
supervisory support,” and “perceived workplace support.” The assumption
behind such measures (p.19) is that some true but unobservable characteristic
of an organization will systematically affect the responses of individuals within
the organization to questions related to those characteristics.
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In the SEM framework, the presence and nature of a latent variable such as
“indirect trauma exposure” or “perceived workplace support” is inferred from
relationships (correlations or covariances) among the scores for observed
variables chosen to measure it. Specifically, one starts with known information—
e.g., a covariance between two observed variables—and applies statistical
principles to estimate the relationship of each indicator to the hypothesized
latent variable. If we hypothesize the existence of the latent variable “ability,”
shown in Figure 2.1, for example, and we know from the questionnaire
responses of 200 subjects that the correlation between items Q1 and Q2 is 0.64,
we know (from measurement theory) that the product of the standardized paths
from “ability” to Q1 and Q2 equals 0.64 (DeVellis, 2003). If we assumed that the
two observed variables are influenced equally by the latent variable “ability,” we
would know that the path coefficients were both 0.80 (because 0.80 × 0.80 =
0.64). Squaring the path coefficients also indicates the
(p.20) amount of variance of

each indicator explained by the
latent variable—64% in example in
Figure 2.1. Because the explained
and unexplained variance of a
variable must equal 100%, we also
know how much of the variance of
each indicator is error
(unexplained variance) (d1 or d2;
36% in the example). The variance
of the error term is the difference
between 100% and the amount of
variance explained by
“ability” (Long, 1983). In other Figure 2.1 Calculating the Relationships
words, 36% of the variance of Q1 of Observed Variables to a Latent
is error variance, or variance that Variable.
is unrelated to the construct of
interest, “ability.”
Given the correlation between Q1 and Q2 and the magnitude of the relationship
between the unobserved construct “ability” and observed scores on Q1 and Q2,
it is possible to estimate scores for subjects on the new latent variable “ability”
and the variance of those scores. This illustration is simplified, but the process of
working “backward” from known relationships (usually covariances among
observed variables) to estimates of unknown parameters is a central notion in
SEM.
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In this discussion, we have illustrated an important property of SEM, that is, the
product of the standardized path coefficients (i.e., 0.80 and 0.80) from one latent
variable to two observed variables equals the correlation (i.e., 0.64) of the
observed variables. In Box 2.1, we provide a proof of the property, which was
developed by Spearman in 1904, marking the birth of SEM. In any SEM,
researchers have observed data, such as a known correlation of 0.64. The known
(or observed) data are used to estimate path coefficients, such as the two
coefficients reflecting the net influence of “ability” on Q1 and Q2. Of course, the
estimation becomes more complicated when there are multiple correlations or
covariances as input data, latent variable effects are not assumed to be the same
on all indicators, there are more than two indicators of a latent variable, and so
on. In more complicated models, in fact, more than one solution is possible—
more than one set of parameters might satisfy the multiple equations defining
the model. An important component of the analysis therefore becomes
determining which solution is the best. We will examine that issue more
thoroughly shortly.
Parts of a Measurement Model

We will now look more closely at the statistical and conceptual foundations of a
measurement model building on the terms introduced in the (p.21) (p.22)
previous section. In this section, and throughout the rest of the book, we will
employ the common practice of using Greek notation to refer to specific
elements in the models presented. For example, using Greek notation, error
terms are indicated by δ (delta), rather than the “d” used in Figure 2.1. Readers
are encouraged to refer to the guide to Greek notation provided in the Appendix
1 for an explanation of all symbols used. The notation for SEM equations,
illustrations, and matrices varies across sources. We present one set of notations
that we believe minimizes confusion across measurement and structural
examples, but readers should be aware that they will encounter other notation
protocols in other sources.
Box 2-1 Proof of an SEM Property and a First Peek at SEM Notation
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In Spearman’s original work, he claimed that observed intercorrelations

among scores on tests of different types of mental ability could be accounted
for by a general underlying ability factor. Using our current example, we can
imagine that the general ability factor affecting all test scores is the latent
variable “ability.” Scores on Q1 and Q2 in this example represent observed
scores on two mental ability subtests. Variance in Q1 and Q2 that is not
explained by “ability” is captured in d1 and d2, respectively. Denoting the
two path coefficients (now called factor loadings) as λ1 and λ2 (lambda 1 and
lambda 2), Spearman proved that the observed correlation between Q1 and
Q2 (i.e., ρ12) equals the product of the two factor loadings λ1 and λ2, or ρ12 =
λ1λ2, or 0.64 = 0.80 * 0.80. To prove this, we first express our model of
Figure 2.1 in the following equations:
Q1 = λ 1 Ability + d1
Q2 = λ 2 Ability + d2 .
Assuming we work with standardized scores for all variables, then the
correlation ρ12 is simply the covariance of Q1 and Q2, or ρ12 = Cov(Q1, Q2).
Using the algebra of expectations, we can further write
Cov ( Q1,Q2 ) = E [ ( λ 1 Ability + d 1 ) ( λ 2 Ability + d2 ) ] = E [ λ 1 λ 2 Ability 2 + λ

1 Abilityd2 + λ 2 Abilityd1 + d1d2 ] = λ 1 λ 2 E ( Ability 2 ) + λ 1 E ( Abilityd2 ) + λ 2
E ( Abilityd1 ) + E ( d1 d2 ) .
Because E(Abilityd2) = 0 and E(Abilityd1) = 0 (because there is no
correlation between the common factor Ability and each error), and E(d1d2
= 0) (because the two measurement errors are not correlated), then the
equation becomes ρ12 = λ1λ2 E(Ability2). Because E(Ability2) is
Variance(Ability) and equals 1 (because Ability is a standardized score), then
ρ12 = λ1λ2. That is, the observed correlation between two variables is a
product of two path coefficients.
Figure 2.2 presents a simple CFA model using common symbols. The model has
three latent variables: Risk1, Risk2, and Behavior. Latent variables are indicated
by circles or ovals. Because they are latent, by definition the three variables do
not exist in a dataset. They are hidden, unobservable, theoretical variables. In
the model, each is hypothesized to have three indicators. Risk1 represents some
risk phenomenon that influences (hence the one-way arrows) the scores
individuals in the database have on three observed variables, x1, x2 and x3. Often
latent variables have more than three indicators, especially when they represent
complex phenomena assessed with many scale items, or items on a
questionnaire. For example, 25 items assessing feelings of happiness, loneliness,
and sadness make up the Generalized Contentment Scale available at the
WALMYR website (http://www.walmyr.com/). It is also possible to have
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(p.23) a latent variable with only

two indicators, but it is best to
have a minimum of three (later in
this chapter, we will examine the
reasons for this in more detail).
Characteristics of a measurement
model represent its factor
structure. See Box 2.2.
Figure 2.2 Measurement Model.
Box 2-2 Components of Factor Structure
The factor structure of a set of variables includes
• the number of factors

• the number of observed items
• the pattern and magnitude of loadings of items on factors
• the correlations among the factors
• correlations among error terms
The common symbol for an observed variable in an SEM diagram (including CFA
models) is a square or rectangle. In Figure 2.2, x1, x2 and x3 are three
questionnaire items. Responses from the questionnaire items have been entered
into a database for analysis. The values may be numbers corresponding to
respondents’ answers to survey questions, or items on a rating scale, or values
coded from administrative, observational, or interview data. Observed variables
may also be recoded variables or composites based on other observed variables.
Like the Risk1 variable, Risk2 and Behavior are latent variables that are
hypothesized to “cause” the observed values of other questionnaire items (x4
through x9).
It may seem inaccurate to call Behavior a latent variable. Aren’t behaviors

observable? Many latent variables include items related to observable behaviors,
such as hyperactivity or impulsivity as manifestations of an underlying attention
disorder, or sleeplessness as a manifestation of depression. Even such
observable phenomena are often more accurately measured with multiple items.
In the latent variable framework, both measurement error and model-specific
error can be removed from the observed indicators, leaving higher quality
measures for use in structural analyses.
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The relationships among the latent and observed variables in Figure 2.2 can also
be expressed in equations that are similar to regression equations. The
equations relating latent variable Risk1 (ξ1, pronounced ksee) to x1, x2 and x3
are (p.24)
x 1 = λ 11 ξ 1 + δ 1
x 2 = λ 21 ξ 1 + δ 2
x 3 = λ 31 ξ 1 + δ 3
(Long, 1983).
The equations state that the score for an individual on any one observed variable
(x1, x2, x3) is the individual’s score on the latent variable times the factor loading
λ (lambda) of the observed variable on the latent variable, plus an error term δ
(delta). Note that the first subscript for a path coefficient (λ in these examples)
refers to the dependent variable in the equation—the variable to which an arrow
is pointing in the figure, or the variable on the left side of the equation. The
second subscript refers to the subscript of the independent variable.
The relationship between a latent factor (ξ) and one of its indicators is similar to
the regression relationship between a predictor, or independent variable, and a
dependent variable. The similarity reflects the fact that scores on the indicator
are “caused” by the latent variable. A critical difference, however, is that in
factor analysis, the predictor variable is unobserved, theoretical, or latent.
Without observed data in the dataset on the predictor, estimating its effects on
observed variables requires a different process than conventional regression
analysis (Long, 1983). It involves the use of matrix algebra and maximum
likelihood estimation, which will be discussed later. Still, the factor loading λ
that is obtained as an estimate of the strength of the effect of the latent variable
(the independent variable) on an indicator (dependent variable) is interpreted
the same as a regression coefficient—that is, a 1-unit change in the latent
variable is associated with a change of magnitude λ in the observed dependent
variable (Long). If variables are standardized, λ “is the expected shift in
standard deviation units of the dependent variable that is due to a one standard
deviation shift in the independent variable” (Bollen, 1989, p. 349).
Another difference between the latent variable equation and standard regression
equations is the lack of an intercept. Observed variables in SEM are treated as
deviations (or differences) from their means; in other words, instead of using the
raw scores that appear in a dataset, SEM software “centers” variables by
subtracting the mean from each score. This transformation has no effect on the
variances and covariances of (p.25) variables (the input data for SEM model
tests) but allows important simplifications of the equations used to estimate
models. Some of these simplifications were evident in the proof presented in Box
2.1. For further explanation, see Long (1983, pp. 22–23).
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In Figure 2.2 rectangles representing observed variables associated with latent

variables have a second arrow pointing to them, coming from smaller latent
variables (whose names start with delta “δ” ). The second arrow suggests that
scores on the observed variable are influenced by something other than the
latent variable of interest. This “something other” is a combination of omitted
effects, primarily measurement errors. It includes traditional measurement error
and a new kind of error that is unique to latent variable models. Traditional
measurement error refers to differences between an individual’s
“true” (unknowable) score for an indicator and the actual observed score
obtained for the individual. Differences between “true” scores and obtained
scores are assumed to be due to random error. Random error is unpredictable—
as when a child makes a picture by filling in the response ovals on a
questionnaire, or when respondents become fatigued and stop reading items
carefully.
In measurement models with latent variables, a second source of measurement

error is grouped with random error and partitioned out of the latent variable
variance. The second type of error is variation in indicator scores that is not
caused by the latent variable(s) modeled in the measurement model, but by
other unobserved factors not relevant to the current model. It may include
systematic measurement error, which is predictable—as when a regional
difference in vocabulary causes all respondents in one region to interpret a
question in the same predictable but wrong way. Or it may include legitimate but
unwanted variation for the current model. An example is provided below.
Measurement error terms in SEM represent variance in an observed indicator

that is due to random and systematic error specific to the indicator. The latent
error variables are also called residual variances or unique factors. They are
“residual,” or “left over,” because they contain all variance of the observed
variables that is not explained by the latent factors of interest regardless of the
source of the variance. They are “unique” because each error term represents
variance that is unique or specific to an observed variable, unlike the latent
factors (also called common factors) which explain variance in multiple observed
variables (i.e., variance that is common to multiple indicators).
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(p.26) As an example of a unique factor, imagine a latent model of depression

(see Figure 2.3). Consistent with the American Psychiatric Association’s
definition of a major depressive episode (American Psychiatric Association,
1994), the model includes cognitive, affective, and physical indicators of
depression, each of which is measured with a certain amount of systematic and
random error. One hypothetical cognitive indicator, “how often in the past 2
weeks have you had trouble concentrating,” is a valid indicator of the cognitive
dimension of depression. We can imagine that a small amount of its variance
(let’s say 5%) is due to random error due to the unpredictable responses of
patients who do not understand the word “concentrating.” We might also
imagine that an additional amount of variance (e.g., 12%) in the indicator is due
to a latent anxiety phenomenon; the item is also reliable and valid indicator of
anxiety. Individuals who are not depressed but who have anxiety respond
predictably to the item, even though their anxiety-driven responses are not
related to the construct of interest. Because our model does not include a latent
anxiety variable, variance in the Concentrate variable that is exclusively caused
by different levels of anxiety in respondents is treated as error in our depression
model.
SEM output provides estimates of the variances of the error terms for latent
variable indicators and indicates if they are statistically significantly different
from 0. Error variance is a summary measure of how much the error terms for a
sample on a predicted variable differ from the mean of those scores, which is
assumed to be 0. Larger error variances indicate that observed items are not
well explained by latent variables or may not be good measures of those latent
variables.
Double-headed arrows in SEM models represent hypothesized correlational

relationships—relationships in which neither variable is considered independent
or dependent. Such relationships are sometimes called “unanalyzed”
relationships. In Figure 2.2, there are double-headed arrows between pairs of
latent factors. When more than one latent construct, or factor, is included in a
measurement model in SEM, the factors are usually allowed to be correlated
with one another. In traditional regression, correlations among independent
variables, although common, are not desirable because they complicate the
interpretation of regression coefficients. Therefore, another advantage that SEM
has over conventional regression is that the correlations among independent
variables can be modeled and estimated. (p.27)
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(p.28) In summary,
measurement models include
latent factors and the
correlations among them,
observed indicators of those
factors, and error terms for
observed variables. Chapter 4
describes in more detail how to
specify confirmatory factor
models and interpret their
results.
Parts of a Structural Model

Whereas measurement models
Figure 2.3 A Closer Look at
are concerned with how latent
Measurement Error Variance
constructs are measured,
Partitioning.
structural models are concerned
with the directional
relationships among latent
variables or factors, once their measurement qualities have been established.
Structural models in SEM are like standard regression models, except that the
independent variables, dependent variables, or both are latent factors measured
with observed indicators. For example, using the three dimensions of indirect
trauma established in the Bride et al. (2004) study discussed earlier, a
hypothetical structural model might test the hypothesis that levels of stress
affect an observed measure of annual number of sick days taken, controlling for
gender and preexisting health condition. The focus in structural models is on
testing the strength and direction of substantive relationships among variables
with implications for theory, practice, or policy.
A major advantage of latent-variable models is that estimates of the

relationships among latent variables are based only on variation in the observed
indicators that is related to the latent variables. If the latent Depression variable
in Figure 2.3 were used as a predictor of another variable, Parenting for
example, the part of Concentrate associated with anxiety (and not depression)
would not be included in the calculation of the Depression’s effect on Parenting.
Variance in Concentrate that is associated with underlying anxiety would be
contained in the error variance for the Concentrate indicator. The estimate
obtained for the relationship of Depression to Parenting would be based only on
the theoretically error-free variance of Depression.
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Figure 2.4 presents a structural model based on Figure 2.2. Although the latent
variables and their relationships to indicator variables are still present, the
structural model has components that are different from the measurement
model. First, there are both single-headed and double-headed arrows among the
three latent variables in the model. Single headed arrows between two latent
variables indicate a hypothesized (p.29)
directional relationship. Figure 2.4

hypothesizes that the two latent
risk variables are statistically
predictive of the behavioral
outcome. Behavior is being
regressed on Risk1, Risk2.
Estimates of the effects of the two
risk variables on Behavior are
denoted with the symbol, γ
(gamma).
Figure 2.4 General Structural Model 1:
Note that when a latent
Direct Effects Only.
variable, such as Behavior, is a
dependent variable in a
structural model or equation, the notation used is η (eta) instead of ξ, which was
used in the measurement model. This is because in SEM, variables are either
exogenous, meaning they are not explained or predicted by any other variables
in the model; or they are endogenous, meaning they are explained or predicted
by one or more other variables. Every latent and observed variable in an SEM
model is either exogenous or endogenous. Endogenous variables serve as
dependent variables in at least one equation represented in a model. In our
simple structural model of risk and behavior, for example, Risk1, Risk2, Gender,
and all of our error terms are exogenous; they have no single-headed arrows
pointing to them. Behavior and all of the variables representing our
questionnaire items (x1 to x9) are endogenous; they have at least one single-
headed arrow pointing to them. Risk1 and Risk2 are connected by a double-
headed arrow. It is important to remember that because a double-headed arrow
symbolizes a correlation, not a directional relationship, the two risk variables
are considered exogenous.
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Note that the distinction between exogenous and endogenous variables is model
specific. Exogenous variables in one study may be (p.30) endogenous variables
in another study, or vice versa. Neighborhood cohesiveness might be an
exogenous predictor of the success of community organizing efforts in one
model, for example, but could be a dependent (endogenous) variable predicted
by community organizing efforts in another. Note also that to avoid confusion
between λ’s associated with exogenous (ξ) and endogenous (η) variables with
the same subscripts, we follow notation used by Bollen (1989) for models
containing both measurement and structural components. Instead of two
subscripts indicating the observed variable number and latent variable number,
respectively, λ’s are simply numbered consecutively with one subscript
throughout the model.
The SEM equation for regressing Behavior (η) on the two risk variables (ξ1, ξ2) is
η 1 = γ 11 ξ 1 + γ 12 ξ 2 + ζ 1
The equation states that the score for an individual on the latent behavior
variable (η1) is predicted by the individual’s score on the Risk1 latent variable
(ξ1) times the regression coefficient γ11 (gamma) plus the individual’s score on
the Risk2 latent variable (ξ2) times the regression coefficient γ12 plus the error
term ζ1 (zeta). ζ is structural error—the variance of Behavior that is unexplained
by its predictor variables. Structural error can also be thought of as the error of
prediction because, as in all regression analyses, variance in a dependent
variable (e.g., the endogenous Behavior variable) is likely to be influenced, or
predicted, by influences other than the variables included in a model. In other
words, we would not expect the risk and gender variables to predict Behavior
perfectly. Box 2.3 explains the difference between this type of error and the
measurement error we discussed in the previous section. Like the measurement
model equations, the equations predicting latent variable scores are similar to
regression equations, but with different notation and no intercepts. Latent
variable scores are also treated as deviations from their means.
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There is an additional observed variable in Figure 2.4: Gender. We know it is an

observed variable because it is represented with a rectangle. Unlike the other
rectangles in the figure, however, it does not appear to be an indicator of a
latent variable. The arrow between Gender and Behavior points toward the
latent variable. The scores individuals have (p.31) on the Gender variable are
not caused by the underlying Behavior tendency of the individuals. Instead, the
arrow represents a hypothesized regression, or structural, relationship. Gender
is being used as a control variable or covariate in the model. With the same
diagram, we could also call Gender another independent variable. By calling
gender a control variable in this example, we are indicating that we are most
interested in the effects of Risk1 and Risk2 on Behavior after removing the
effects of gender on Behavior, that is, the effects of the two independent
variables on variation in Behavior left over after the effects of gender have been
accounted for. Based on Figure 2.4, the complete regression equation for
Behavior needs to include Gender (ξ3). In this example, Gender is a tenth
observed variable that affects the dependent variable and is not itself predicted
by any other variable in the model:
η 1 = γ 11 ξ 1 + γ 12 ξ 2 + γ 13 ξ 3 + ζ 1
Box 2-3 Two Types of Error in SEM
In the discussion of measurement models starting on p. 20, we defined

measurement error as “unique” and “residual” variation in scores of
observed indicators that were not associated with the hypothesized factor
model. An additional type of error is relevant to structural models and should
not be confused with measurement error. SEM structural models, like other
regression models, include structural errors. The structural error for any
dependent variable in a structural model is the variance of the variable that
is not explained by its predictor variables. Although the latent risk and
behavior variables in Figure 2.4 are theoretically free of measurement error,
we do not expect the risk and gender variables to predict Behavior perfectly.
In other words, we do not expect 100% of the variance of Behavior to be
explained by the two risk variables and gender. In a general structural
model, any variable that is regressed on others in the model has an error
term representing the structural error (this error can also be thought of as
the “error of prediction”). The latent variable ζ1 represents the error in our
structural model—the variation in behavior scores that is not explained by
Risk1, Risk2, and Gender.
Page 14 of 30
In this equation, Gender (ξ13) has been added as the third predictor of Behavior
(η1). γ13 is the regression coefficient representing the effect of Gender on
Behavior scores. Including the gender variable in Figure 2.4 illustrates how
structural models in SEM can include a combination of latent and observed
independent (and dependent) variables.
(p.32) The absence of double-headed arrows between Gender and the risk
variables signifies that the correlations between Gender and risk are expected to
be 0. It is important to remember that any possible path between two variables
in an SEM model that is not explicitly pictured represents the hypothesis that
the value of the directional or nondirectional relationship is 0. In the current
example, Risk1 and Risk2 might be latent measures of neighborhood
disorganization and danger, which we would not expect to be correlated with
gender.
The equations for indicators of Behavior in the measurement part of the

structural model also change from those used for the measurement-only model
in Figure 2.2. The indicators of latent variables, like Behavior, that serve as
dependent variables in a model are now noted as y variables (instead of x), and
their error terms are noted with ε (epsilon, instead of δ). In addition, as stated
earlier, the latent variable is now notated with η (instead of ξ):
y1=λ7η1+ε1
y2=λ8η1+ε2
y3=λ9η1+ε3.
All endogenous variables in a model are predicted (imperfectly) by one or more
other variables. Therefore, they all have associated error terms. If the predicted
variables are observed indicators of the measurement part of a model, the error
terms represent measurement error. If the variables are substantive dependent
variables (either latent or observed) being regressed on predictors, the error
terms represent structural errors.
Figure 2.5 presents a slightly different structural model. Risk1, Risk2, δ1 through
δ6, ε1 through ε4 and ζ1 and ζ2 are exogenous variables. Behavior, Parenting,
Par10 (y4), x1 through x6, and y1 through y3 are endogenous variables. There are
two structural errors, ζ1 and ζ2, and 10 measurement errors, δ1 through δ6, and
ε1 through ε4.
In Figure 2.5, Parenting is a new latent variable with one indicator (Par10). We
can imagine that the Parenting variable is an observed composite—the sum of
responses to 10 items on a parenting scale. Modeled as it is, Parenting is a
second endogenous latent variable whose value is equal to its one observed
indicator, which may or may not be (p.33)
Page 15 of 30
modeled as having a positive error

variance. We could fix the error
term of Par10 to 0, if we believe it
is a perfect measure of parenting
(an unlikely claim), to a value
between 0 and 1 if its reliability is
known from previous studies; or
we could seek an estimate of the
variance of ε4 in the current SEM
analysis. This modeling technique
demonstrates one way to include Figure 2.5 General Structural Equation
an observed variable of Model 2: Direct and Indirect Effects.
substantive interest in a latent
variable model. (The modeling of
Gender in Figure 2.4 illustrated another.)
In Figure 2.5, Parenting mediates the effects of Risk2 on Behavior. If Risk2 is a
latent variable assessing neighborhood danger, for example, we could
hypothesize that danger affects children’s behavior indirectly by influencing
parents’ monitoring of their children’s activities. Parenting serves both as a
dependent variable because it is predicted by Risk2, and an independent
variable because it predicts Behavior. The addition of Parenting as an
endogenous variable necessitates a new equation for the specification of the
structural model, and a change in the equation for predicting Behavior. The
predictive equation for Parenting is
η 2 = γ 22 ξ 2 + ζ 2 .
Behavior (η1) is now predicted directly by the exogenous variable Risk1 (ξ1, with
a γ path), and by the endogenous Parenting variable with a β (beta) path.
Because there is no direct path from Risk2 to (p.34) Behavior, ξ2 does not
appear in the equation predicting Behavior (even though Risk2 has an indirect
effect on Behavior):
η 1 = β 12 η 2 + γ 11 ξ 1 + ζ 1 .
In summary, structural models in SEM models with latent variables have
measurement components and structural components. The structural paths
hypothesize substantive relationships among variables. Paths from exogenous (ξ)
to endogenous (η) latent variables are γ paths. Paths from endogenous to
endogenous latent variables are β paths. Observed indicators of exogenous
variables are “x” variables and have error terms labeled δ. Observed indicators
of endogenous variables are “y” variables and have measurement error terms
labeled ε. Structural errors, or errors of prediction, are designated with the
symbol ζ.
Testing Models—An Introduction
Page 16 of 30
The inclusion of latent variables in SEM models necessitates an analysis

approach that is different from the approach used in regression models with
observed variables. If the user specifies a raw dataset for analysis, the SEM
program first generates a covariance matrix (in the default situation) from the
raw data. It is also possible to provide a covariance matrix without its associated
raw data. Either way, the covariance matrix provides the data analyzed in the
SEM program. The data are used to estimate the parameters in the model
specified by the user. Models, as we’ll see later, are specified in Amos through
graphics such as those presented in Figures 2.4 and 2.5. In Mplus, the user
specifies the model with simple syntax dictating measurement and structural
relationships.
After a CFA or general SEM is specified based on the researcher’s theoretical

model, the next step is to use the observed data (i.e., a covariance or correlation
matrix) to estimate the parameters specified. This step is called model
estimation. The maximum likelihood estimator (ML) is the most popular
approach used in the model estimation and is the default method of SEM
programs. Additionally, weighted least squares (WLS) is a family of methods that
may be especially relevant for social work data. Later, we will describe some of
the options available and how to choose among them.
(p.35) After data, a model, and an estimation procedure have been selected,
the SEM program iteratively generates estimates for parameters in the model,
which means the program continues to make and refine estimates that are
consistent with the input covariance matrix until no improvements can be made.
In a measurement model, the parameters to be estimated are the factor
loadings, latent variable variances and covariances, and measurement error
terms. In a general structural model, estimates of regression paths among latent
variables and structural error variances are also generated. A simplified version
of how the estimation process occurs was presented in the discussion of Figure
2.1. In reality, most models contain many parameters to be estimated, so the
program must attempt simultaneously to find estimates consistent with
numerous criteria, not just one initial covariance.
Page 17 of 30
What does it mean to say “no improvements” can be made in a model? The
determination of what are the best obtainable estimates is based on the
minimization of a function that the SEM program uses to compare the original
covariance matrix of the observed variables and a new covariance matrix that is
implied by the specified model and the estimates generated in the estimation
procedure. The new matrix is generated taking into account the constraints
imposed by the model specified by the user. For example, in Figure 2.5, a
moderate to strong covariance between observed variables x1 and x2 is
suggested by their common relationship to Risk1. In contrast, the model
suggests that the covariance between x1 and y1 is much smaller and occurs only
through the relationship of each observed variable with its latent variable. The
goal is to obtain an implied matrix that is as close to the original covariance
matrix as possible. The minimization function basically assesses how close each
element in the original covariance matrix is to its corresponding element in the
implied covariance matrix generated by each set of estimates tried. We will
return to this concept frequently because it is so key to understanding SEM.
Before we can go much further with this discussion of testing structural
equation models, we need to examine the numerous roles that matrices play in
SEM.
Matrices in SEM
A matrix is set of elements (i.e., numbers, values, or quantities) organized in
rows and columns. Most social work researchers are familiar (p.36) with
matrices. An Excel spreadsheet summarizing incoming students’ test scores,
grades, and demographics; a grading grid; and a proposal budget are just some
examples of matrices. The simplest matrix is one number, or a scalar. Other
simple matrices are vectors, which comprise only a row or column of numbers.
Correlation matrices are commonly encountered in social work research. They
summarize raw data collected from or about individuals and vary in size based
on the number of variables included. Correlation matrices have the same
number of rows and columns—one for each variable. Matrices can be multiplied,
divided, added, subtracted, inverted, transposed, and otherwise manipulated
following rules of matrix algebra.
Page 18 of 30
Matrices are used in multiple ways in SEM analyses. Analyses rely, for example,
on data in the covariance or correlation matrices that summarize values in a raw
dataset. Also, all specified measurement and structural models with latent
variables are translated by SEM software into between three and eight matrices
(some of which may be vectors or scalars). The matrices are then manipulated
based on established proofs from matrix algebra and the algebra of expectations
to generate estimates of unknown parameters. Because matrices have known
properties and the outcomes of different operations on matrices (e.g., adding or
multiplying them together) are known, they provide a shortcut way—that is, a
faster, easier, less computationally demanding way—to accomplish the goals of
SEM analyses. As stated earlier, matrices are also the basis of the fundamental
SEM method of evaluating the quality of a model—comparing the original input
matrix to the model-implied matrix of covariances. More about each of these
roles of matrices in SEM is presented below. A full explanation of matrix algebra
is beyond the scope of this book. Bollen (1989) provides a useful summary for
interested readers. Long (1983) discusses matrix algebra as it applies to CFA.
In addition to being used by SEM programs to estimate models, matrices are

useful tools that researchers use to specify models in great detail. Matrix
notation can be used to present and expand upon the information given in SEM
equations, such as the equations presented earlier in this chapter. SEM software
can be used without in-depth knowledge of matrix algebra, but understanding
the basic role of matrices in SEM has practical benefits for preventing
misspecification errors, interpreting output, and solving problems reported by
software. It also makes users more confident and knowledgeable in the written
and oral presentation of their research.
(p.37) Matrices 1: Expanding Equations into Matrix Notation

Measurement Model Equations. The measurement model pictured in Figure 2.2
contains information for the three matrices used to specify and estimate CFA
analyses. The equations presented earlier contain the same information as the
figure. Recall the following equations:
x 1 = λ 11 ξ 1 + δ 1
x 2 = λ 21 ξ 1 + δ 2
x 3 = λ 31 ξ 1 + δ 3 .
The equations state that the observed scores of each x in the dataset are
predicted by a score on the latent factor (ξ1, Risk1) times a factor loading (λ)
plus error (δ). We can add similar equations for the rest of the observed
variables, which load on Risk2 (ξ2) and Behavior (ξ3) in the factor model in
Figure 2.2:
x 4 = λ 42 ξ 2 + δ 4
x 5 = λ 52 ξ 2 + δ 5
x 6 = λ 62 ξ 2 + δ 6
x 7 = λ 73 ξ 3 + δ 7
Page 19 of 30
x 8 = λ 83 ξ 3 + δ 8
x 9 = λ 93 ξ 3 + δ 9 .
All of these relationships can also be compactly expressed in the following
equation:
x=Λxξ+δ
where Λ (capital λ) is the matrix of λ’s, or factor loadings relating latent
variables to observed variables. The equation states more generally (p.38) that
the vector of values for a variable x in a raw dataset is a product of the variable’s
factor loading (Λ) on the latent variable (ξ) and the vector of scores for cases on
that latent variable, plus a vector of error terms.
The matrix format corresponding to both the detailed and compact equations is
[ x 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8 x 9 ] [ λ 11 0 0 λ 21 0 0 λ 31 0 0 0 λ 42 0 0 λ 52 0 0 λ 62 0 0 0
λ 73 0 0 λ 83 0 0 λ 93 ] [ ξ 1 ξ 2 ξ 3 ] + [ δ 1 δ 2 δ 3 δ 4 δ 5 δ 6 δ 7 δ 8 δ 9 ]
.
Brackets are used to enclose matrices. Mathematical symbols indicate the
operations specified for the matrices. The juxtaposition of the Λ and ξ matrices
indicate that they are to be multiplied. The equations predicting observed
variables from latent variables can be derived from this matrix expression by
progressing across each line and performing the operations. For x1, the three
terms in the first row of Λx matrix are multiplied by the elements in the ξ matrix
as follows, x1=
[ λ 11 0 0 ] [ ξ 1 ξ 2 ξ 3 ] = λ 11 ( ξ 1 ) + 0 ( ξ 2 ) + 0 ( ξ 3 ) = λ 11 ( ξ 1 )
.
Then, the error term δ1 is added, resulting in the equation given earlier:
x 1 = λ 11 ξ 1 + δ 1 /
.
In models with endogenous latent variables (e.g., Figure 2.4), the endogenous
latent variable equations have the same format but different notation, as
indicated earlier:
y1=λ7η1+ε1
(p.39)
y2=λ8η1+ε2
y3=λ9η1+ε3.
These equations can be expanded into matrix notation in the same way as the
exogenous latent variable equations.
Structural Model Equations. Figure 2.5 included two endogenous variables, one
of which (Parenting, η2) was predicted by an exogenous latent variable (Risk2,
ξ2), and one of which (Behavior, η1) was predicted by both the exogenous latent
variable (Risk1, ξ1), and the endogenous observed Parenting variable (η2). The
equations given earlier for these structural relationships were
Page 20 of 30
η 1 = β 12 η 2 + γ 11 ξ 1 + ζ 1
η 2 = γ 22 ξ 2 + ζ 2 .
The compact expression for these equations is
η=Bη+Γξ+ζ.
where B (capital β) is the matrix of β parameters between endogenous variables,
and Γ (capital γ) is the matrix of γ parameters between exogenous and
endogenous variables.
The matrix format corresponding to both the detailed and compact equations is
[ η 1 η 2 ] = [ 0 β 12 0 0 ] [ η 1 η 2 ] + [ γ 11 0 0 γ 22 ] [ ξ 1 ξ 2 ] + [ ξ 1 ξ 2 ]
.
If you carry out the operations, you obtain
η 1 = ( 0 ) η 1 + β 12 η 2 + γ 11 ξ 1 + ( 0 ) ξ 2 + ζ 1 ,
which reduces to the original equation for η1 above.
In summary, one important way that matrices are used in SEM is to convey the
elements and operations of equations that define SEM models.
(p.40) Matrices 2: Computational Matrices

SEM estimation involves the manipulation of between three (for measurement-
only models) and eight matrices (for general structural models). Each of these
matrices is described below. The matrices will be discussed in later chapters, so
the information in this section should be viewed as reference material, not
material that needs to be fully understood at this point.
Measurement-Only Model Matrices. Because all CFA latent variables are

exogenous, all observed variables in a CFA model are labeled “x,” all latent
variables are labeled ξ, and all error terms are labeled δ. (Note, however, that
other texts sometimes use x and y notations in measurement models based on
the role of the latent variables in later general structural models.) CFA models
include a Λ matrix containing factor loadings (λ’s) specifying which observed
variables load on which factors. This matrix has a row for each observed variable
and a column for each hypothesized latent variable. The Λ matrix for our Figure
2.2 example with nine observed variables and three factors would be the
following:
Λ x = [ λ 11 0 0 λ 21 0 0 λ 31 0 0 0 λ 42 0 0 λ 52 0 0 λ 62 0 0 0 λ 73 0 0 λ 83 0 0 λ 93 ]
.
Page 21 of 30
Although the rows and columns are not labeled, it is understood through the
subscripts that the rows correspond to observed x variables 1 through 9, and the
columns correspond to latent ξ variables 1, 2, and 3. We noted earlier that the
first λ subscript in factor equations referred to the (dependent) indicator
variable, and the second referred to the factor. The same rule applies for the Λ
matrix entries; the first subscript refers to the number of the indicator variable
or row, and the second refers to the number of the factor or column. In Figure
2.2, no observed variable (p.41) loaded on more than one factor. Consistent
with the figure, the Λx matrix above specifies that one factor loading is to be
estimated for each variable and the loadings for the other two factors are to be
fixed at 0. In confirmatory factor analysis, it is possible, however, to have
variables load on multiple factors. If, for example, observed variable 2 (x2)
loaded on factors 1 and 3 (ξ1, ξ3), and variable 6 (x6) loaded on factors 1 and 2
(ξ1, ξ2), the matrix for the model would be
Λ x = [ λ 11 0 0 λ 21 0 λ 23 λ 31 0 0 0 λ 42 0 0 λ 52 0 λ 61 λ 62 0 0 0 λ 73 0 0 λ 83 0 0 λ 93
]
.
A second matrix that is used in the analysis of a measurement model is the Φ
(capital phi) matrix, containing variances and covariances of the latent variables
(φ’s, phis). This matrix has one row and one column for each latent variable in a
model. The phi matrix for the model in Figure 2.2 with three correlated latent
variables, therefore, would look like the following:
Φ = [ φ 11 φ 21 φ 22 φ 31 φ 32 φ 33 ]
.
The phi matrix is symmetrical. Values above the diagonal are not included
because they are identical to those below the diagonal. The covariance of ξ1 and
ξ2, for example, is the same as the covariance between ξ2 and ξ1. As with a
covariance matrix of observed variables, the values on the diagonal are
variances. Again, the rows and columns are not labeled, but it is understood
through the subscripts that the values from left to right and from top to bottom
apply, respectively, to ξ1, ξ2, (p.42) and ξ3. If any pair of factors in a model do
not covary, a 0 would replace the corresponding off-diagonal φ element.
Page 22 of 30
The third matrix used in the analysis of measurement models is the Θδ (theta
delta) matrix, containing the error variances and covariances of the observed
indicators of exogenous variables (θ’s). The theta matrix has one row and one
column for each observed variable in the CFA model. The diagonal of the Θδ
matrix contains the variances of the error terms of observed variables, and the
off diagonals contain their covariances. Usually error terms are not correlated,
however, in CFA they are allowed to be, if there is theoretical justification. It is
considered reasonable, for example, to allow the errors of the same measure
administered at two different times to be correlated. Often, CFA models are
revised to include correlated errors to improve fit. This issue will be discussed in
more detail in Chapter 4. In the example of a Θ matrix following this paragraph,
most of the error covariances are fixed at 0, however, the matrix specifies that
the covariance between the error terms for variables 4 and 5 is expected to be
different from 0:
Θ δ = ( θ 11 0 θ 22 0 0 θ 33 0 0 0 θ 44 0 0 0 θ 54 θ 55 )
The estimates in the Λx,Φ, and Θδ matrices are used in SEM analyses to generate
an x by x matrix of estimated population variances and covariances (Σxx, sigma)
using the equation presented after this paragraph. The equation is based on a
sequence of algebraic proofs using matrix algebra and expectation theory, which
are beyond the scope of this book. Users interested in learning how the equation
was derived as a central expression in CFA are referred to Bollen (1989) and
Long (1983) for more information.
∑ xx = Λ x Φ Λ x ′ + θ δ
Long (1983) emphasizes the importance of this equation. It indicates how
estimated parameters of a confirmatory factor model can be (p.43)
manipulated into a new implied matrix of variances and covariances that can be
compared to the original matrix of observed variances and covariances. It is
important to remember that because the symbols are capital Greek letters, each
element of the equation represents a matrix (not just one number). In words, the
equation reads as follows:
(a) the multiplication of the Λ matrix of factor loadings by the Φ matrix of

latent variable variances and covariances, and
(b) the multiplication of the resulting matrix by the transpose of the Λ
matrix, and
(c) the addition to each element in the resulting matrix of the
corresponding elements in the matrix of estimated error variances and
covariances of the observed variables (θδ)
Page 23 of 30
generates Σxx, which is a matrix of estimates of population variances and

covariances. The new square matrix will have the same number of rows and
columns as the original input covariance matrix. The number of rows and
columns will equal the number of observed variables in the analysis. The newly
estimated matrix has a central role in determining the quality of the
hypothesized model, which we will discuss in more detail shortly.
Structural Model Matrices. So far, we have discussed the three matrices that are
used in the analysis of a confirmatory factor model. Up to five additional
matrices are used in the analyses of structural models. First, the factor loadings
of the indicators of dependent latent variables are contained in the Λy matrix,
which has the same properties as the previously discussed Λx matrix. The
variances of the error terms for the indicators of the dependent latent variables
are contained in a Θε (theta epsilon) matrix that has the same properties as the
Θδ (theta delta) measurement matrix. Note that the error variance of an
exogenous variable like Gender in Figure 2.4, which is assumed to be measured
without error, would be fixed to 0 and included in the Θδ matrix. The error
variance of Par10 in Figure 2.5, would also set to 0 if the endogenous latent
Parenting variable in that model was assumed to be measured without error by
Par10. If Par10 had a known reliability, its error variance could alternatively be
specified in the Θε matrix as 100% minus that reliability value.
(p.44) A third new matrix encountered in general structural models is the Γ

(gamma) matrix. The regression relationships between exogenous ξ and
endogenous η variables are contained in the Γ matrix. The matrix has one row
for each endogenous variable and one column for each exogenous variable in the
model. The Γ matrix for Figure 2.5 would look as follows:
[ γ 11 0 0 γ 22 ]
.
The γ11 parameter represents the path from Risk1 (ξ1) to Behavior (η1) that is
present in Figure 2.5. The 0 to its right represents the absence of a path from
Risk1 to Parenting—i.e., the fixing of the value of that path to 0. The 0 in the
second row represents the absence of a hypothesized path from Risk2 to
Behavior. The γ22 parameter represents the path from Risk2 to Parenting.
The fourth new matrix encountered in general structural models is the B (beta)
matrix, which contains the regression paths between pairs of endogenous (i.e.,
η) variables. This matrix has one row and one column for each endogenous
variable in a model. The B matrix for Figure 2.5 would look as follows:
[ 0 β 12 0 0 ]
.
Page 24 of 30
The diagonal of a B matrix always contains 0s because a variable cannot be

regressed on itself (Bollen, 1989). The term above the diagonal in the matrix
presented represents the regression path from Parenting (η2) to Behavior (η1) in
Figure 2.5.
The final new matrix that is used in the estimation of structural models is the Ψ
(psi) matrix, which contains the variances and covariances of the structural
errors (i.e., ζ’s) in a model. Endogenous latent variables are not represented in
the Φ matrix of variances and covariances among ξ’s, and their variances are not
estimated. Instead, the variances of their associated error terms are estimated.
The values represent the amount of variance in the endogenous variables that is
unexplained by predictors in the model, and from these values the percent of
variance explained can be calculated. In Figure 2.5 there are two endogenous
structural variables (Behavior and Parenting). Each has a ζ term. The Ψ matrix
has one row (p.45) and one column for each endogenous variable. In most
cases, no correlation between ζ terms will be modeled, so off-diagonal elements
of the Ψ matrix will be 0. The diagonal of the matrix contains the variances of
the error associated with each endogenous variable. For Figure 2.5, this matrix
would look as follows:
( Ψ 11 0 0 Ψ 22 )
.
Some structural models with latent variables do not posit directional
relationships among endogenous latent variables; they may only have directional
relationships among exogenous and endogenous variables. In such cases, no B
matrix is needed.
We saw earlier that one equation, Σxx = ΛxΦΛx´+θδ, relates CFA model estimates
to the population covariance matrix of observed variables. For structural models
with Λy, Θε, Γ, B, and Ψ, matrices, the relationship is more complicated. A new
matrix based on four matrix blocks created by four equations relates estimates
of parameters in the eight SEM matrices to the new implied matrix of variance
and covariances. Notation for these equations varies across sources; we use
Bollen’s (1989) notations:
(∑YY=ΛY(Ι−B)−1(ΓΦΓ'+Ψ)[(Ι−B)−1]'ΛY'+Θε∑YX=ΛY(Ι−B)−
1(ΓΦΛ'X)∑XY=ΛXΦΓ'[(Ι−B)−1]Λ'Y∑XX=ΛXΦΛX'+Θδ)
Page 25 of 30
Note that the lower right equation is the covariance equation used in CFA
models. Because CFA, or measurement-only, models have no η, β, γ, λ y or ε
values, and therefore no B, Γ, Λy, Θε, or Ψ matrices, only the third equation is
necessary to generate the comparison matrix in CFA models. For the derivation
of these equations based on matrix algebra and expectancy theory, see Bollen
(1989). Although it is not essential to know how these equations were derived, it
is important to understand that the equations permit the all-important linking of
estimated parameters to an implied matrix that can be compared to the original
covariance matrix of observed variables.
When parameter estimates can be used to recreate a covariance matrix of the

observed variables in a model, the comparison of the new (p.46) matrix with
the original matrix, which is central to the SEM analysis framework, is possible.
Matrices 3: Analyzed or Input, Implied or Reproduced, and Residual Matrices

Unlike other statistical analysis, the input data for SEM is usually a covariance
matrix of observed variables, or a correlation matrix of observed variables plus
the means and standard deviations of the variables (from which a covariance
matrix can be generated). SEM programs will accept raw data, but they only use
them to generate the necessary input matrix before an SEM analysis is
conducted.
The input variance–covariance matrix, or its corresponding correlation matrix

plus standard deviation and mean vectors, not only provides the data for SEM
analysis, but it also makes possible the key mechanism for testing the quality of
a CFA or general structural model. The quality of SEM results is measured in
terms of how well the SEM model being tested can reproduce the analyzed
matrix. An SEM model, such as the one presented in Figure 2.4, implies a set of
relationships among the observed variables contained in the model. Figure 2.4,
for example, implies that observed variables x1, x2, and x3 are more highly
correlated with each other than with observed variables x4, x5, and x6. The
variables x1, x2, and x3 are still expected to have some degree of correlation with
x4, x5, and x6, due to the correlation between Risk1 and Risk2. Figure 2.4, on the
other hand, does not imply a correlation between Gender and the observed
indicators of Risk1 and Risk2. When two variables have no arrows linking them,
the implication is that they are unrelated, uncorrelated, or have a correlation of
0. Note that although Gender, Risk1, and Risk2 all have arrows pointing to
Behavior, that fact does not imply correlations between the risk variables and
gender. Correlations among structural variables are not implied when pathways
are going the “wrong” direction along an arrow.
Page 26 of 30
As we described in the overview, each estimation method available in SEM

programs uses its own unique formula to obtain estimates of model parameters
that minimize the differences between the input matrix and the model implied
matrix. The implied matrix, then, is the matrix of covariances or correlations
that is as close to the input matrix as possible, given the hypothesized model, the
relationships it implies among the original observed variables, and the
estimator’s minimization function.
(p.47) The null hypothesis in SEM is that the population covariance matrix
equals the matrix that is implied by the CFA or general structural model. The
equation for this null hypothesis in the population is
H0:∑=∑(θ)
The equation states simply that the population variance covariance matrix (Σ,
sigma) equals the implied matrix (Σ) that is based on esti-mated parameters
(contained in θ). (Note that θ here has a different meaning from the θ used to
designate the measurement error matrices.) Technically, this null hypothesis
invokes the inference of population values from sample statistics. Because the
population matrix is rarely available to researchers, however, the sample
covariance matrix (derived from the observed variables in our dataset) is
substituted in the equation (Bollen, 1989). Therefore, the equation for the null
hypothesis in the sample is
H0:S=∑(θˆ).
which states that the covariance matrix Σ(θˆ) reproduced based on parameter
estimates is not statistically different from the input matrix of observed
covariances for the sample (S). As described in Box 2.4, the SEM researcher
wants to accept the null hypothesis of no difference.
Box 2-4 The (Backward) SEM Null Hypothesis
The null hypothesis in SEM analyses is that the input or analyzed matrix of
observed covariances is statistically the same as the implied or reproduced
matrix obtained by estimating parameters specified in the researcher’s
model. Unlike in an intervention study, for example, where the researcher
wants evidence that two group means are not the same, the SEM researcher
wants to accept the null hypothesis of no difference:
H0:S=∑(θˆ)
The difference between two matrices such as S and Σ(θˆ) can be presented
in a third matrix, the residual matrix, in which the elements indicate the
differences between corresponding elements in the input and implied
matrices.
Page 27 of 30
(p.48) The residual matrix is the matrix containing the differences between
corresponding elements in the analyzed and implied matrices. It is obtained by
subtracting each element of the implied matrix from its counterpart in the input
matrix. If the elements of a residual matrix are small and statistically
indistinguishable from 0, then the analyzed model fits the data well.
Testing Models—A Closer Look

The Key to SEM: The Discrepancy (or Fitting) Function
The hypothesis about the relationship between the analyzed and implied
matrices is fundamental in SEM. Unlike in most other statistical procedures, the
goal in SEM is to accept the null hypothesis. Why? Because, if the null
hypothesis is true—the implied matrix is not statistically different from the
original observed covariance matrix—then the researcher has evidence that his
or her model and the hypotheses upon which it is based are supported by the
data, consistent with the data, or not brought into question by the data.
Before the input and implied matrices are compared to determine if the null
hypothesis can be accepted or must be rejected, the estimator attempts to
minimize the difference between the two matrices. An iterative estimation
process is used in which parameter estimates are obtained, tested, tweaked, and
tested again until no more reduction in the difference between the original and
implied matrices can be obtained. The determination that the two matrices are
as similar as possible is made through applying a “fitting” or “discrepancy”
function that quantifies the difference. The set of parameter estimates that
yields the smallest value for this discrepancy function becomes the final solution
for the model. When the smallest value is achieved, the estimation process has
converged on a solution in which the discrepancy function has been minimized.
The minimization value obtained is critical for assessing the hypothesis that the
input and implied matrices are statistically equivalent.
After the discrepancy function has been minimized, various tests are run to
determine just how similar the two matrices are, and whether the differences
are statistically significant. One test reported by all SEM (p.49) software is the
actual statistic obtained with the discrepancy function. Values obtained with the
fitting functions are χ2 (chi square) distributed, so they can be evaluated in
terms of statistical significance with regard to the number of degrees of freedom
(discussed in the following section on identification) of the model. A
nonsignificant χ2 value indicates that the null hypotheses can be retained—the
researcher’s model is consistent with the data. A statistically significant χ2 value
indicates that S and Σ(θˆ) are statistically different. However, due to limitations
of the χ2 statistic, there are now a large number of additional tests of fit that can
be used to support claims of good fit, even if the χ2 statistic is statistically
significant. Specific fit indices will be examined in Chapter 6.
Identification
Page 28 of 30
A final concept that should be introduced here is model identification. SEM

models must be identified in order for the matrix manipulations they require to
succeed. A statistical model is said to be identified if it is theoretically possible
to derive a unique estimate of each parameter (Kline, 2005). Conceptually, model
identification refers to having enough observed information to make all the
estimates requested in a model. Hence, identification is a data issue concerning
the number of known pieces of data and the number of parameters to be
estimated in a model.
Although software programs generally provide warnings when a model is not

identified, it is important for researchers to understand the concept in order to
avoid identification problems, to know how to solve such problems if they occur,
and to perform their own identification calculations, particularly in the cases of
more complicated SEM models. Kline (2005, pp. 106–110) provides a good
explanation of the concept of identification that readers can use to supplement
our discussion.
Structural equation models are identified (generally) when there are more
covariances and variances in the input data matrix than there are parameters to
be estimated, and when each latent variable has a metric or measurement scale
(Kline, 2005). The amount of observed information available for an SEM model is
the number of unique elements in the covariance or correlation matrix being
analyzed. Model underidentification occurs when the number of parameters to
be estimated in a model (p.50) exceeds the number of unique pieces of input
data, or when there is too little information available for the estimation of any
one parameter. In SEM analysis, “just-identified” means that the number of
parameters to be estimated in a model is equal to the number of unique pieces
of input data. The difference between the number of unique matrix elements and
the number of parameters to be estimated is called the degrees of freedom of a
model.
Illustration of Identification
Count the number of observed variables in Figure 2.2. There are nine variables
represented with rectangles in the model, x1 through x9. A covariance matrix of
these variables would have 9 by 9 elements. However, the full matrix would have
fewer than 81 pieces of unique information because it contains redundant items.
For example, the covariance of x1 and x5 would be presented in the column
under x5; the covariance of x5 with x1, the same quantity, would be presented in
the column under x1. Instead of 81 pieces of information in a 9 by 9 covariance
matrix, there are p (p +1)/2, or 9(10)/2 = 45, unique pieces of information,
where p is the number of observed variables.
Page 29 of 30
Table 2.1 illustrates a covariance matrix of three variables (p = 3). The variances
of the three variables are along the diagonal and are nonredundant pieces of
information. The three covariances above and below the diagonal are redundant
—only one set should be counted. Using the formula p(p + 1)/2, there are 3(3 +
1)/2 = 6 unique pieces of information in the matrix—the number shown in the
shading in Table 2.1.
In any measurement model, the parameters to be estimated include elements of

the Λ, Φ and Θδ matrices (the factor loadings of observed indicators on one or
more factors, the variances and covariances of the latent factors, and the error
variances of the observed indicators, respectively). Count the number of
parameters to be estimated in the
Table 2.1 Illustration of Unique Elements in a Covariance Matrix
x1 x2 x3
x1 Var. of x1 Cov. of x1 & x2 Cov. of x1 & x3
x2 Cov. of x2 & x1 Var. of x2 Cov. of x2 & x3
x3 Cov. of x3 & x2 Cov. of x3 & x2 Var. of x3
(p.51) measurement model presented in Figure 2.2. There are nine observed
variables and nine factor loadings. One loading on each factor is typically fixed at 1 for
scaling the latent variable and identifying the latent variable. (More will be said about
this later.) Fixing one loading per factor reduces the number of parameters to be
estimated. With three factor loadings (one for each factor) fixed at 1, only six factor
loadings need to be estimated. There are three latent variables, so three variances
will be estimated. There are three interfactor covariances. There are nine error
variances, one for each observed variable. Therefore, 21 parameters need to be
estimated. The covariance matrix contains 45 unique elements. 45 – 21 equals a
positive number, so the model is identified. It has 45 – 21 degrees of freedom, or 24 df.
If the model had 0 degrees of freedom, that is, it is just-identified, only one solution is
possible and it will have perfect fit (the input and implied matrices will be equal).
Models with 0 degrees of freedom cannot be tested for their quality in comparison to
other models. Models with negative degrees of freedom (i.e., underidentified models)
will not run in most SEM programs—there are too few rules guiding the analysis, and
an infinite number of solutions may be possible.
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SEM Concepts

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Structural Equation Modeling Concepts

University Press Scholarship Online

Oxford Scholarship Online

Structural Equation Modeling

Print publication date: 2011

Structural Equation Modeling Concepts

Abstract and Keywords

In this chapter we discuss in detail a number of theoretical and statistical

Latent Versus Observed Variables

The distinction made between latent and observed variables represents a

As we have described, latent variables are measured indirectly through multiple

Latent constructs also apply to characteristics of organizations. In a study of

(p.20) amount of variance of

Parts of a Measurement Model

In Spearman’s original work, he claimed that observed intercorrelations

Cov ( Q1,Q2 ) = E [ ( λ 1 Ability + d 1 ) ( λ 2 Ability + d2 ) ] = E [ λ 1 λ 2 Ability 2 + λ

(p.23) a latent variable with only

Figure 2.2 Measurement Model.

Box 2-2 Components of Factor Structure

The factor structure of a set of variables includes

• the number of factors

It may seem inaccurate to call Behavior a latent variable. Aren’t behaviors

In Figure 2.2 rectangles representing observed variables associated with latent

In measurement models with latent variables, a second source of measurement

Measurement error terms in SEM represent variance in an observed indicator

(p.26) As an example of a unique factor, imagine a latent model of depression

Double-headed arrows in SEM models represent hypothesized correlational

Parts of a Structural Model

A major advantage of latent-variable models is that estimates of the

directional relationship. Figure 2.4

There is an additional observed variable in Figure 2.4: Gender. We know it is an

Box 2-3 Two Types of Error in SEM

In the discussion of measurement models starting on p. 20, we defined

The equations for indicators of Behavior in the measurement part of the

modeled as having a positive error

Testing Models—An Introduction

The inclusion of latent variables in SEM models necessitates an analysis

After a CFA or general SEM is specified based on the researcher’s theoretical

In addition to being used by SEM programs to estimate models, matrices are

(p.37) Matrices 1: Expanding Equations into Matrix Notation

(p.40) Matrices 2: Computational Matrices

Measurement-Only Model Matrices. Because all CFA latent variables are

(a) the multiplication of the Λ matrix of factor loadings by the Φ matrix of

generates Σxx, which is a matrix of estimates of population variances and

(p.44) A third new matrix encountered in general structural models is the Γ

The diagonal of a B matrix always contains 0s because a variable cannot be

When parameter estimates can be used to recreate a covariance matrix of the

Matrices 3: Analyzed or Input, Implied or Reproduced, and Residual Matrices

The input variance–covariance matrix, or its corresponding correlation matrix

As we described in the overview, each estimation method available in SEM

Box 2-4 The (Backward) SEM Null Hypothesis

Testing Models—A Closer Look

A final concept that should be introduced here is model identification. SEM

Although software programs generally provide warnings when a model is not

In any measurement model, the parameters to be estimated include elements of

Table 2.1 Illustration of Unique Elements in a Covariance Matrix

x1 Var. of x1 Cov. of x1 & x2 Cov. of x1 & x3

x2 Cov. of x2 & x1 Var. of x2 Cov. of x2 & x3

x3 Cov. of x3 & x2 Cov. of x3 & x2 Var. of x3

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