One way of estimating the impact of another year of education on individual’s ea
ID: 1190656 • Letter: O
Question
One way of estimating the impact of another year of education on individual’s earnings would be to survey individuals about their level of education and earnings and then estimate the following equation
Log Earnings= a + bEducation + e
Where e is an error term that you do not need to worry about.
a)What do labor economists call b? Provide a one sentence definition. (4 points)
b)What is the magnitude of a typical estimate of b? (4 points)
c)Economists have found that it is difficult to get a meaningful estimate of b. Why is this task so difficult? Provide 3 reasons. (6 points)
Some economists have tried to get a better estimate of b by looking at the earnings and education levels of men who graduated from high school during the Vietnam draft era. Describe the “experiment” that economists have used in this context. Why might it be better than estimates of b obtained above? What is one concern about estimates of b that are generated by this “experiment?”
Explanation / Answer
(a) b is the coefficient of education or one can even say the measure of change in earnings due to change in education levels.
(B) Earnings and education are said to be strongly and positively correlated. That is an increase in education levels may lead to increase in the earnings of the individuals. The b can be anywhere near +1, though there is no perfect correlation between education and earnings still the b will be close to +1.
(C) The meaningful estimates of b is difficult as the education is not the only factor that affects earnings. inheritance from the family may affect the earnings of the individual. Parental education or family income, scores on cognitive achievement tests, and self-reported motivation may also be a factor.
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