assignment2 - University of California, Santa Barbara...

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University of California, Santa Barbara Olivier Deschenes Department of Economics Winter 2011 ____________________________________________________________________________ Economics 140B Individual Assignment 2 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 ) ˆ ln( arn E = 0.54 + 0.083 Educ , 2 R = 0.20, SER = 0.445 (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? What if your theory suggested that there was a “diploma effect”? (b) In Econ 150B, you learned that there should also 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? (c) You incorporate the potential experience variable into your original regression
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assignment2 - University of California, Santa Barbara...

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