Econ 140B 2

Econ 140B 2 - Amy Reed 8799975 Econ 140B Homework #2 1. a)...

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Amy Reed 8799975 Econ 140B Homework #2 1. a) Holding all else constant, the effect of one additional year of schooling would increase average hourly earnings by 8.3%. If I had a strong belief that years of high school education were different than years of college education, I would modify the regression to include two separate variables, one including all years of education up and through high school, and one including all years of education post high school. This would allow me to compare the coefficients to compare their different effects. If my theory suggested that there is a “diploma effect,” I would use binary variables for the various degrees, including high school, bachelors, masters, etc. These variables would be 0 if the individual did not obtain the particular degree, and 1 if the individual did obtain the degree. Therefore, the individual would only receive the benefit of the increased average hourly earnings if they obtained the degree. b) The approximation of Exper = Age Educ – 6 is used because schooling doesn’t begin until the age of 5 or 6 years. This is not likely to resemble years of employment for all sub-groups of the labor force, as females with children often take maternity leave, which can offset their years of experience. Another example of when this approximation would be incorrect would be for students who take time off after college to travel or engage in other leisure activities before embarking on their career. c) Education = 12, experience = 40 – 12 – 6 = 22: ln(Earn)= -0.01 + 0.101(12) + 0.033(22) – 0.0005(22 2 )
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ln(Earn)= -0.01 + 1.212 + 0.726 – 0.242 ln(Earn)=1.686 Education = 12, experience = 23: ln(Earn)= -0.01 + 0.101(12) + 0.033(23) – 0.0005(23 2 ) ln(Earn)= -0.01 + 1.212 + 0.759 – 0.2645 ln(Earn)=1.6965 An additional year of experience for a person who is 40 years old and had 12 years of education would result in ln(Earn) increasing by 0.0105, thus average hourly earnings will increase by 1.05%. Education = 12, experience = 60 – 12 – 6 = 42: ln(Earn)= -0.01 + 0.101(12) + 0.033(42) – 0.0005(42 2 ) ln(Earn)= -0.01 + 1.212 + 1.386 – 0.882 ln(Earn)=1.706 Education = 12, experience = 43: ln(Earn)= -0.01 + 0.101(12) + 0.033(43) – 0.0005(43 2 ) ln(Earn)= -0.01 + 1.212 + 1.419 – 0.9245 ln(Earn)=1.6965 An additional year of experience for a person who is 60 years old and had 12 years of education would result in ln(Earn) decreasing by 0.0095, thus average hourly earnings will decrease by 0.95%. d) β 2 is 0.033, and is significantly different from 0, because of the following: β 2 – 0 = 0.033 – 0 = 5.5 SE(β 2 ) 0.006 | t | = 5.5, therefore | t | > 2 and we can reject the null hypothesis.
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β 3 = -0.0005, and is significantly different from 0, because of the following: β 3 – 0 = -0.0005 – 0 = -5 SE(β 3 ) 0.0001 | t | = 5, therefore | t | > 2 and we can reject the null hypothesis. The coefficient on education changed very little as experience and education are not
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Econ 140B 2 - Amy Reed 8799975 Econ 140B Homework #2 1. a)...

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