Question

1. A researcher wishes to examine the relationship between wage earned and educational level of workers. For a sample of 4000 workers she has data on hourly earnings (measured in SAR), age of the worker (in years), worker’s gender, years of experience, number of years with the present employer, size of the firm in which the worker is employed, and highest educational qualification (with 4 classifications: no qualification, secondary school certificate, bachelor degree or PhD)

1. Explain how you would set up a model to address the researcher’s key interest.
2. Based on your model, how would you estimate the predicted impact on wages of holding a PhD compared to having a bachelor’s degree.
3. If the researcher uses ln(wage) as the dependent variable, how would the estimated coefficients be interpreted?
4. What general advice would you give the researcher in relation to her work – eg. what econometric issues should she be aware of in conducting this research and interpreting the results?

Answer 1

a) From the given the dependent variable for the research is wage which is continuous variable.So we are going to setup a multiple regression model.

With Dependent variable : wage

Independent variables : Educational level,Hourly earnings,Age,Gender,Years of experience,Years with present company,Size of the company.

To build a regression model we need to convert categorical variables to numerical by one hot encoding/dummification.

Here I dont have any data to build model

General Expression :

Education levels are converted to three columns using Dummification technique,Gender is encoded as Male:1,Female:0.

b)Here considering PHD as education level-1 based on the regression coefficient of edu level 1 we can predict the impact of PHD on wage.

c)Based on the estimated coefficients of regression equation

represents the minimum wage offered by a company with out considering any factors. Its like basic wage

In general if regression coefficients are positive then wage is directly proportional to independent variable or visa-versa.

Based on the magnitude of the regression coefficient we can infer about the effect of independent variable on the wage.

d)One concern is on the inflation level and any recision going on.