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

Exercise 11

Add the interaction term union.t-t to the equation estimated in Table 14.2 to see if wage growth depends on union status. Estimate the equation by random and fixed effects and compare the results.

Table Three Different Estimators of a Wage Equation

Step 1 of 2

On adding the interaction term in the wage equation model with as the dependent variable and, the year dummy variables as the explanatory variables along with as the other explanatory variables when estimated using random effects, the result is:

The coefficient of is 0.173912 with the p-value 0.0000 which is less than the critical p-value of 0.05 at 5% level of significance, indicating that is a significant variable that affect

The coefficient of is -0.0155 with the p-value 0.0062 which is less than the critical p-value of 0.05 at 5% level of significance, indicating it to be significant in determining

On adding the interaction term in the wage equation model with as the dependent variable and, the year dummy variables as the explanatory variables along with as the other explanatory variables when estimated using fixed effects, the result is:

It shall be noted that the explanatory variables such asare not time-variant for each individual so they are excluded from the fixed effects estimation. Secondly, the dummy variable for 1981 is considered as the base year in the fixed effects estimation.