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

Exercise 3

Use the data in CPS78_85.RAW for this exercise.>

(i) How do you interpret the coefficient on y85 in equation? Does it have an interesting interpretation? (Be careful here; you must account for the interaction terms y85-educ and y85-female.)

(ii) Holding other factors fixed, what is the estimated percent increase in nominal wage for a male with 12 years of education? Propose a regression to obtain a confidence interval for this estimate. [Hint: To get the confidence interval, replace y85-educ with y85-(educ — 12); refer to Example 6.3.]

(iii) Reestimate equation but let all wages be measured in 1978 dollars. In particular, define the real wage as rwage = wage for 1978 and as rwage = wage/1.65 for 1985. Now, use log(rwage) in place of log(wage) in estimating. Which coefficients differ from those in equation?

(iv) Explain why the R-squared from your regression in part (iii) is not the same as in equation. (Hint: The residuals, and therefore the sum of squared resid¬uals, from the two regressions are identical.)

(v) Describe how union participation changed from 1978 to 1985.

(vi) Starting with equation, test whether the union wage differential changed over time. (This should be a simple t test.)

(vii) Do your findings in parts (v) and (vi) conflict? Explain.

Step 1 of 9

(i)

Given the equation:

The coefficient of is interpreted as the wage growth being 11.8% higher when the year is 1985 than when the year is 1978, other factors remaining constant.

It is also interpreted as the growth in the wage is 11.8% higher in the year 1985 than when the year is 1978 for a male with no education and no job experience.