Suppose that the wage paid to manufacturing workers in dangerous occupations (e.

Question

Suppose that the wage paid to manufacturing workers in dangerous occupations (e.g. mining, slaughterhouses, chemical processing) depends primarily on two factors: on-the-job experience and risk of death, both of which increase wages. Furthermore, suppose that a worker's risk of death generally declines with his experience on the job. Now suppose the National Association of Manufacturing Workers wants to predict the impact of a proposed safety regulation on wages. Their analyst predicts that the regulation will cause wages to decline by x AOD, where AROD 0 is an estimate for the slope coefficient of the following model: wage o +P,ROD+u Is P, x AROD likely to be an unbiased estimator for the change in wages caused by the regulation? If so, explain why. If not, explain the likely direction of the bias. Write down a formal model for the bias to support your answer

Explanation / Answer

It may be biased estimator because the variable for experience has been omitted which may lead to to ommited variable bias. This will result in overestimation . To get the expression for bias

Let us consider the complete model is

Wage = 0+1*ROD+2*EXP+u ; where EXP is experience and ROD is risk of death

So bias = 2*b21

Where b21 is the regression coefficient for regression of experience on ROD.

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