Below are the results of the regression analysis in which log of monthly wages o

Question

Below are the results of the regression analysis in which log of monthly wages of urban workers in some developing country regressed on education and experience (no adjustment is made for sex/gender). The reason for experience appearing twice (Experience and Experience2 ) is that additional year of experience does boost wages but the increase is smaller and smaller, i.e., diminishing marginal returns to experience, so the relationship between wages and experience is concave, similar to the left branch of inverted parabola. log w = 7.291 + 0.114 · Education + 0.042 · Experience 0.001 · Experience2 R 2 = 0.473 (0.020) (0.001) (0.001) (0.000) Please answer the following questions regarding coefficient interpretation. (a) Carefully interpret the effect of education on log w and absolute wages. (b) Check whether the coefficient of education is statistically significant and explain what it means. (c) Carefully explain the effect of additional year of experience on log w and absolute wages. (d) Lastly, interpret the constant term of the regression and explain any caveats related to it.

Explanation / Answer

a. There is a significant effect on log w due to eduction variable. because the test of the coefficient of education is significant i.e the t-test statistics value of p is less than 0.05. Hence the value of log w will change significantely due to education variable.

b. the coefficient of education is statistically significant because the calculated p-value is 0.001 which is less than 0.01 i.e less than 1 % level of significance.

c. the effect of additional year of experiance significantely affect the log w because the calculated p-value 0.001 and 0.0000 which is less than 0.01 i.e at 1% level of significance.

d. the intercept of the regression model is 7.291 and its test statistics p-value is insignificant because p-value is 0.02 which is greater than 0.01 its mean that it is insignificant at 1 %. the minimum log w value is 7.291 if a person has no education, no experience, and experiance2.

the value of R2 is 0.473 which is very less value and it indicates given independent variable is not linearly related to the log w dependent variable.

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