7. (8 points) An econometrician collects information on the wages, schooling, an

Question

7. (8 points) An econometrician collects information on the wages, schooling, and experience of workers. She uses the data to estimate a regression equation of the forrn log(u) a +b-sit c-d.+, where log(w) is the log wage, s, is years of formal schooling, z, 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 (b) Explain why the log wage might be an increasing, concave function of experience

Explanation / Answer

(a)

i. As one spends more years in education, they acquire skills that may become relevant in the market. Hence we might observe a positive association between schooling and wages.

ii. More education also signals something about the ability of an individual who may then be paid higher than someone who has spent less time in schooling.

(b) Higher experience in a particular industry implies that a worker can negotiate a better wage in the market. Thus log wage will be an increasing function of the experience. However, there are certain non-linearity associated with experience. So, log wage will be an increasing function of experience till a certain threshold. Beyond that threshold of experience years, the growth in wage rate will stagnate and even become negative. This non-linearity is the reason why log wage might also be a concave function of experience.

Related Questions

Navigate

• Browse (All)
• Browse 7
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.