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Using a model from a study on wage and education data, among a sample of students...

Using a model from a study on wage and education data, among a sample of students without college degrees, where wage is an hourly dollar figure and education refers to additional years of schooling, suppose the following results for a regression of earnings on prior earnings:

waget = -.48 +.54education

A) Predict the hourly wage for someone with 14 years of schooling.

B) What is the average level of education if the average hourly wage is $6.00?

C) Do you think this intercept makes sense?

D) What do you think would happen to the parameters if we included college graduates?

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Homework Answers

Answer #1

(A) When Education = 14,

Wage = - 0.48 + (0.54 x 14) = - 0.48 + 7.56 = 7.08

(B) When Wage = $6,

6 = - 0.48 + 0.54 x Education

0.54 x Education = 6.48

Education = 12 (years)

(C) The intercept is -0.48 which means that a person with 0 years of schooling will earn a wage of -$0.48, which has no logical sense since wage cannot be negative.

(D) Inclusion of college graduates will most likely increase the coefficient of Education. It means that as years of education rises, wage rate rises at a faster rate than before.

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