Question

Consider the Mincer equation (the human capital earnings function) for a sample of i = 1,...

Consider the Mincer equation (the human capital earnings function) for a sample of i = 1, ..., N individuals: ln Yi = β0 + β1Si + β2Expi + β3Exp2 i + i (1) • ln Yi is the natural logarithm of yearly earnings • Si is years of schooling acquired • Expi is years of labor market experience • i is the error term What is the size of the return to an extra year of education?

A. β2%

B. β1%

C. i

D. β1

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Answer #1

B1%

( usually slope coeeficient gives the change in explained variable when explanatory variable changes by one unit. Here,We are dealing with a log-linear model. Dependent variable is expressed in logarithmic form. The coefficients in log- linear model represent the percentage change in explained when explanatory variable changes by 1%. Our explanatory variable is years of education. Coefficient associated with it is B1. So size of return to an extra year of education is B1%. )

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