assignment2_solution - University of California, Santa...

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University of California, Santa Barbara Olivier Deschenes Department of Economics Winter 2011 Economics 140B Individual Assignment 1: Answer Key Due in class 02/01/11 These questions are from Stock and Watson and from Wooldridge Question 1 (12 points): Earnings functions attempt to find the determinants of earnings, using both continuous and binary variables. One of the central questions analyzed in this relationship is the returns to education. (a) Collecting data from 253 individuals, you estimate the following relationship Educ arn E 083 . 0 54 . 0 ) ˆ ln( , 445 . 0 , 2 . 0 2 SER R (0.14) (0.011) Where Earn is average hourly earnings and Educ is years of education. What is the effect of an additional year of schooling? If you had a strong belief that years of high school education were different from college education, how would you modify the equation? That if your theory suggested that there was a “diploma effect”? ANSWER: One additional year of education carries an 8.3% increase, or a return, on earnings. You would need additional data to see if this coefficient was different for high school versus college education. Including both variables in the regression would then allow you to test for equality of the coefficients. A “diploma effect” could be studied by creating a binary variable for a high school diploma, a junior college diploma, a B.A. or B.Sc. diploma, etc. (b) In ECON 150B, you learned that there should be returns to on-the-job training. To approximate on-the-job training, researchers often use potential experience variable, which is defined as Exper = Age Educ – 6. Explain the reasoning behind this approximation. Is it likely to resemble years of employment for various sub-groups of the labor force? ANSWER: The idea is that everybody works except in the first six years of life and during the time spent in school/university for education. This approximation will work better for people with a strong attachment to the labor force. It will not work well for females and those who are frequently unemployed or out of the workforce. (c) You incorporate the potential experience variable into your original regression 2 0005 . 0 033 . 0 101 . 0 01 . 0 ) ˆ ln( Exper Exper Educ arn E (0.16) (0.012) (0.006) (0.0001) 405 . 0 , 34 . 0 2 SER R
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What is the effect of an additional year of experience for a person who is 40 years old and had 12 years of education? What about a person who is 60 years old with the same education background? ANSWER: For the first person, the Exper variable increases from 22 to 23, and results in a 1.1% earnings increase. For the 60 year old, there is an expected decrease of 1%. The effect of an additional year of experience =
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This note was uploaded on 09/04/2011 for the course ECON 140b taught by Professor Staff during the Winter '08 term at UCSB.

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assignment2_solution - University of California, Santa...

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