Question

You have a random sample of 5911 individuals from the US Current Population Survey (CPS) and are interested in the relationship between hourly earnings and education. You estimate the following model: wagei = β0 + β1Ci + ui.

where Wagei is average hourly earnings for the ith individual and Ci is education years. Suppose we use a dataset and obtain the following estimated equation by OLS (homoskedasticity-only standard errors in parenthesis):

E(wagei) =11.7 + 5.09Ci

(0.11) (0.17)

R2 = 0.13.

(1) In terms of the model parameters, state the null hypotheses: “education cannot change the hourly wage”, and the alternative hypotheses: “education can change the hourly wage”.

(2) Calculate the t-statistic for (1)

(3)Can you reject the null hypothesis at the 1% significance level? (If X∼N(0,1), Prob(X>1.65) =0.05, Prob(X>1.96) =0.025, Prob(X>2.58) =0.005.)

Answer 1

Solution: