Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge

Exercise 21

An equation explaining chief executive officer salary is

The data used are in CEOSAL1.RAW, where finance, consprod, and utility are binary variables indicating the financial, consumer products, and utilities industries. The omitted industry is transportation.

(i) Compute the approximate percentage difference in estimated salary between the utility and transportation industries, holding sales and roe fixed. Is the difference statistically significant at the 1% level?

(ii) Use equation to obtain the exact percentage difference in estimated salary between the utility and transportation industries and compare this with the answer obtained in part (i).

(iii) What is the approximate percentage difference in estimated salary between the consumer products and finance industries? Write an equation that would allow you to test whether the difference is statistically significant.

Equation

Step 1 of 3

a.

The approximate percentage difference in estimated salary between utility and transportation industry is captured by dummy variable utility in regression equation.

The coefficient estimate of utility is -0.283, which indicates that the salary workers receive in utility industry is less compared to transportation industry. Overall a worker on an average earns 28.3% less compared to a worker in transportation sector.

To test the significance of difference in salary in two sectors, apply t-test of significance.

Under null hypothesis, it is assumed that the coefficient estimate is not statistically significant (or equal to zero), against alternative hypothesis, that it is statistically significant.

Under hypothesis,

Where, µ is the mean value (or coefficient)

Under, t-test,

This is significant at 1% level of significance. The difference in estimated salary between the two sectors is significant.