Graded Assignment – Alternative
This assignment accounts for 10% of your grade. It should follow an essay format, which
means you must add an introduction, analysis and conclusion. The word limit of the text is
500. You should add tables as figures to avoid exceeding your word limit. You are encouraged
to use at least Wooldridge (2012) in order to provide references for your tests and rationale.
Your task is to assess the most appropriate specification as displayed in Table 1. Such results
are based on the data from Blackburn and Neumark (1992), which is found as WAGE2 in
Wooldridge (2012). The econometric model is the following:
log(????????????????) = ????0 + ????1???????????????? + ????2???????????????????? + ????3???????????? + ????4???????????? 2 + ????5???????????????????? + ????6???????????????????? + ????
Where wage is measured as monthly earning in U.S. dollars, and it is determined by years of
education, years of experience, age in years and its squared value, if the person is black and
if the person lives in the Standard Metropolitan Statistical Area as a proxy for urban areas.
The weighted least squares (WLS) has a weight of 1/????????????????. The two-stage least squares
(2SLS) uses the following variables as external instruments: mothers education, fathers
education and number of siblings. You should also assume that those instruments are valid
and relevant.
Table 1: The effects of individual characteristics on wages
Dependent variable lwage
OLS
OLS with
robust SE WLS 2SLS
educ 0.064*** 0.064*** 0.066*** 0.114***
exper 0.014*** 0.014*** 0.015*** 0.032***
age -0.010 -0.010 -0.028 -0.121
age2 0.0003 0.0003 0.001 0.002
black -0.241*** -0.241*** -0.233*** -0.167***
urban 0.188*** 0.188*** 0.182*** 0.177***
constant 5.618*** 5.618*** 5.911*** 6.761***
Observations 935 935 935 722
R2 0.206 0.206 0.199 0.155
Adjusted-R2 0.201 0.201 0.194 0.148
F Statistic
(df=6; 928) 40.199*** 40.199*** 38.387*** N/A
Note: *p<0.1;**p<0.05;***p<0.01
Econometrics
First, you must select the most appropriate specification among the four [ordinary least squares (OLS), OLS with robust standard errors, WLS or the 2SLS]. Be specific on the steps
you should, the tests you should perform and their null hypothesis, and the reasoning behind
the decisions you make on the selection process.
Second, after selecting the most appropriate model, you must interpret its results. You must
mention the coefficients, statistical significance, R-squared and F-statistics (if appropriate). Be
precise and explain the meaning and/or null hypothesis of each concept if necessary.
References
Blackburn, M. L. and Neumark, D. 1992. Unobserved Ability, Efficiency Wages, and Interindustry Wage Differentials:, date last accessed February 1, 2021, at Quarterly Journal of Economics at http://qje.oxfordjournals.org/
Wooldridge, J. M. 2012. Introduction of econometric: a modern approach, South-Western College Pub
