5. Suppose the following wage regression is run on a sample of black and Hispani

Question

5.         Suppose the following wage regression is run on a sample of black and Hispanic workers (whites are not included in the data set or in the wage regression):

Wage = b0 + b1*Hispanic + b2*Age

where the variables are as defined in class. Refer to the empirical results below when answering the questions.

Coefficients

Standard Error

t Stat

Intercept

-1.888

8.733

-0.216

Hispanic

1.356

0.857

1.582

Age

0.391

0.180

2.179

a) According to these regression results, do blacks earn less than Hispanics?

b) How much less would a 30-year old expect to earn on average than a 32-year old?

c) Which variables are statistically significant at the 95 percent confidence level?

d) Calculate the average wage of a 20-year old Hispanic.

e) Suppose blacks average 13.0 years of education and Hispanics average 12.5 years of education. What effect will re-running this regression including the education variable have on the Hispanic coefficient?

Coefficients

Standard Error

t Stat

Intercept

-1.888

8.733

-0.216

Hispanic

1.356

0.857

1.582

Age

0.391

0.180

2.179

Explanation / Answer

ANs a)

We need to find the significance of estimated coefficient of Hispanic Variable. We found that t statistic for Hispanic is 1.582 that is even for larger sample when significance level is 1% or 5% or 10% we have limiting value such as 1.65 0r 2 or 2.56

Hence calculated t stat for hispanic is less than the value provided at any level of significance

therefore we cant reject null hypothesis and based on this sample we say that black earn as much as hispanics do

Ans b)

We can consider that estimated values of coefficients of Intercept and Hispanic are not other than 0 hence removing these 2 independant variable from regression equation

Hence our regression line becomes Wage=0.391*Age

Wage for 30 year old if black

w1=-0.391(30)=11.73

0.391(30)=11.1980

Wage for 32 year old

w2=-0.391(32)=12.51

Hence the differene is 12.51-11.73=0.78

Ans c)

Only Age is Statistcally significant because it exceeds value of critical t equal to 2

Ans d)

Average wage of 20 year ispanic

0.391(20)=7.82

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