7. (8 points) An econometrician c ollects information on the wages, schooling, a

Question

7. (8 points) An econometrician c ollects information on the wages, schooling, and experience of b s, + workers. She uses the data to estimate a regression equation of the form log w) c . xi-d·z? + ei, where log(u) is the log wage, si s years of formal schooling. xi Is years of work experience, and e, captures other factors that affect earnings (a) Describe two reasons why there might be a positive relationship between schooling and wages. Explain why the log wage might be an increasing, concave function of experience

Explanation / Answer

a. Positive relation between schooling and wages may be exhibited due to these reasons;

1. Increase in the level of education imparts more skills to the workers thus making them fit to do more skilled jobs thus increasing the pay of workers.

2. This increase in educational training allows the student to be a more efficient worker, being more attractive to employers, and, consequently, it increases the possibility of higher earnings

b. As experience has a positive relationship with the wages, thus wages increase with an increase in the year of experience. However, the impact is significant with a particular extent only as most of the jobs require a specified amount of experience level along with a specific set of skills. Thus having more experience in a particular field which is more than required does not make a significant difference in the number of wages earned.

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