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# Each March the Bureau of Labor Statistics in the U.S. Department of Labor

surveys approximately 65,000 randomly selected U.S. households. The March 2005 survey collected data for March 2004 data on labor force characteristics of the population, including the level of employment, unemployment, and earnings.

The file CPS04 contains the following data:

female: 1 if female; 0 if male

age: in year

ahe : average hourly earnings

colgrad: 1 if worker has a bachelor's degree; 0 if worker has a high school degree

1. As a first approximation we can start by postulating that average hourly earnings depends on age only. We do not need a theory to justify this because common sense tells us that age does not depend on average hourly earnings.

ahe = f(age)                                                                                                                                                                                               (1)

Specify a linear regression model for the population. List all definitions and assumptions you make about the model

2.  Following is the Stata output from a regression of average hourly earnings on age. Report the estimated model in the space below..

3. Discuss your results focusing on how reliable is the model and whether it does an adequate job of explaining variation in average hourly earnings (Hint: Does hourly earning depend on education and gender?).

4. Based on your discussion revise the model in question 1 and specify the additional assumptions below.

5. Following is Stata output for a regression that uses the sample data. Report the sample regression equation below.

6. Test the hypothesis that college education and gender are jointly significant determinants of average hourly earnings at a 1% level of significance.

7. What is the difference in average earning of a male from a female? Is it significant?

The average hourly earnings of a male is \$3.16 higher than that of a female and this difference is statistically significant because the calculated t-statistics for the coefficient for 'female' is greater than 2 in absolute terms.

8. Is the difference in average earning of a college graduate significantly different from that of a high-school graduate?

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