Labor economists study the determination of labor earnings using a statistical e

ID: 3218730 • Letter: L

Question

Labor economists study the determination of labor earnings using a statistical earnings function. A simple example of such a regression, estimated using data for 31, 093 men, is log Y_i = 7.58 + 0.070 X_i + epsilon_i, where Y denotes earnings and X is years of education; log denotes a natural logarithm. The estimated standard error of the coefficient on years of education is 0.00160. (a) Using your knowledge of logarithmic functional forms, explain the interpretation of the coefficient on education. (b) Obtain a 90% confidence interval for the rate of return to education. (c) You are told that years of education is a proxy for the intended variable "ability." Indicate the direction of bias in the least squares estimate of returns to education if it is assumed that ability and education are positively correlated and the effect of ability on wages is positive.

Explanation / Answer

t(a/2,n-2)

=T.INV.2T(0.1,29)*0.0016

0.002719

lower

=0.07-T.INV.2T(0.1,29)*0.0016

0.067281

upper

=0.07+T.INV.2T(0.1,29)*0.0016

0.072719