Question

An old economic question is the effect of schooling on wages, which are strongly and positively related. Give an example of an omitted variable that might bias the estimated relationship, and explain why you think it's a problem. Be sure to talk about the two features of a problematic omitted variable. HTML Editoru B 7 IC A, A, TE EX X, SE V VDT 12pt Paragraph O words Question 2 3 pts One approach to solving the problem estimating the impact of schooling on wages is limit your attention to limit attention to identical twins. How might that help? Does it solve all the problems?

Answer 1

This paper uses a new survey to contrast the wages of genetically identical twins with different schooling levels. Multiple measurements of schooling levels were also collected to assess the effect of reporting error on the estimated economic returns to schooling. The data indicate that omitted ability variables do not bias the estimated return to schooling upward, but that measurement error does bias it downward. Adjustment for measurement error indicates that an additional year of schooling increases wages by 12-16 percent, a higher estimate of the economic returns to schooling than has been previously found.

For omitted variable bias to occur, the omitted variable ”Z” must satisfy two conditions: The omitted variable is correlated with the included regressor (i.e. The omitted variable is a determinant of the dependent variable (i.e. expensive and the alternative funding is loan or scholarship which is harder to acquire.

Question-2

Identical twins have been used, in around a dozen studies to date2
, to provide
estimates of the causal effect of schooling on earnings that are, arguably, free from
ability bias. “Ability” here is used to denote any unobserved attributes that are
specific to an individual, fixed over time, and associated with productivity in the
labour market and hence wages. This covers a multitude of unmeasured endowments
that are associated with a greater ability to make money, such as pre-school human
capital investments and non-cognitive attributes like motivation and perseverance, as
well as any purely genetic component of intellectual ability.