Question

1. Consider the following OLS regression line obtained from a random sample of 500 workers: log (wage) = 0.3 + 0.1 educ + 0.005 exper+ 0.02 tenure (1), where wage is hourly wage (measured in dollars), educ is years of formal education, exper is years of labor market experience and tenure is years with the current employer. Use equation (1) to obtain the estimated effect on wage when an individual stays at the same firm for 10 more years. The total effect (holding educ fixed) is [T]%. (NOTE: Write your answer in number format, with 2 decimal places of precision level; do not write your answer as a fraction. Add a leading minus sign symbol, a leading zero and trailing zeros when needed. Use a period for the decimal separator and a comma to separate groups of thousands. )

Answer 1

The given regression equation is-

log(wage) = 0.3 + 0.1 educ + 0.005 exper+ 0.02 tenure

If a person stays at the same firm for 10 more years, it means that his tenure increases by 10 years. That is, ∆tenure = 10

At the same time, the experience of the person ( work experience) will also increase by 10 years.

So, the total effect from the change in tenure will be calculated as follows-

∆log wage= 0.005*∆exper+0.02*∆tenure (we are not taking intercept and education as they are fixed and assumed to be fixed, respectively).

Thus, ∆log wage= 0.005*10+0.02*10

∆log wage= 0.05+ 0.2 = 0.25

Thus, if the tenure increases by 10 years, the wage will increase by 0.25*100= 25 percent.