Question

Part 1. Empirical Analysis Estimate the Mincer's earnings equation in (hpay) = 30 +B* eduyear +B*exp+B3* exp? and answer the following questions a. Explain the theoretical meaning of the coefficient of school education, By, and interpret the estimates. b. What are the signs for B2, B3? Draw the experience-earnings profile and discuss the shape of the profile. C. Assume that there is unobservable workers' ability. If this unobserved ability affects on worker's earnings and the level of education, can we conclude the estimate of B1 is close to the true parameter value?

Answer 1

Part 1

(a) the coefficient of school education means that a 1-year increase in education leads to a Beta1*100 % change in the value of earnings

(b) The sign for Beta2 is positive and the sign for Beta3 is negative. Thus, the earnings are concave in the experience. The earnings increase in experience initially but decrease after a point.

(c) No, the estimate of Beta1 is not close to the true value as there is omitted variable bias in the regression equation. Since the unobserved ability is related both to education and earnings, the coefficient on earnings is biased.