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

Exercise 9

(i) In the wage equation in Example 14.4, explain why dummy variables for occupation might be important omitted variables for estimating the union wage premium.

(ii) If every man in the sample stayed in the same occupation from 1981 through 1987, would you need to include the occupation dummies in a fixed effects estimation? Explain.

(iii) Using the data in WAGEPAN.RAW, include eight of the occupation dummy variables in the equation and estimate the equation using fixed effects. Does the coefficient on union change by much? What about its statistical significance?

Step 1 of 3

(i)

In the wage equation in whichis the dependent variable and , the year dummy variables as the explanatory variables along with as the other explanatory variables, , the dummy variables for occupation such as are the important omitted variables for estimating the union wage premium, because the different occupation have different degrees of union that has the direct impact on the wage earnings in the given occupation and account for the wage-differential across different occupations, besides the factors such as. In presence of union in the given occupation, wage differences across the occupations are attributed to not only the nature of the occupation but also to the degree of union in that given occupation. Going further, the men in the sample does change occupation over time, as the result, if the occupation is not considered in the wage equation; it would result in wage-differential without considering the role of union in the given occupation