1. A study published in 1993 used US state panel data to investigate the relationship between minimum wage and the employment of teenagers. The sample period was 1977 to 1989 for all 50 states. The author estimated a model of the following type: ln(Eit) = β0 + β1ln(Mit/Wit) + γ2D2i + ... + γnD50i + δ2B2t + ... + δTB13t + uit where E is the employment to population ratio of teenagers, M is the nominal minimum wage, and W is average hourly earnings in manufacturing. In addition, other explanatory variables, such as the adult unemployment rate, the teenage population share, and the teenage enrollment rate in school, were included. (a) Name some of the factors that might be picked up by time and state fixed effects (b) The author decided to use eight regional dummy variables instead of the 49 state dummy variables. What is the implicit assumption made by the author? Could you test for its validity? How? (c) The results, using time and region fixed effects only, were as follows: ˆ ln(EIT ) = −0.182ln(Mit/Wit) + ...; R2 = 0.727 . (0.036) Interpret the result briefly. (d) State minimum wages do not exceed federal minimum wages often. As a result, the author decided to choose the federal minimum wage in his specification above. How does this change your interpretation? How is the original equation ln(Eit) = β0 +β1ln(Mit/Wit)+γ2D2i +...+γnD50i +δ2B2t +...+δTB13t +uit affected by this?
1. A study published in 1993 used US state panel data to investigate the relationship
between minimum wage and the employment of teenagers. The sample period was
1977 to 1989 for all 50 states. The author estimated a model of the following type:
ln(Eit) = β0 + β1ln(Mit/Wit) + γ2D2i + ... + γnD50i + δ2B2t + ... + δTB13t + uit
where E is the employment to population ratio of teenagers, M is the nominal
minimum wage, and W is average hourly earnings in manufacturing. In addition,
other explanatory variables, such as the adult
population share, and the teenage enrollment rate in school, were included.
(a) Name some of the factors that might be picked up by time and state fixed
effects
(b) The author decided to use eight regional dummy variables instead of the 49
state dummy variables. What is the implicit assumption made by the author?
Could you test for its validity? How?
(c) The results, using time and region fixed effects only, were as follows:
ˆ ln(EIT ) = −0.182ln(Mit/Wit) + ...; R2 = 0.727
. (0.036)
Interpret the result briefly.
(d) State minimum wages do not exceed federal minimum wages often. As a result,
the author decided to choose the federal minimum wage in his specification
above. How does this change your interpretation? How is the original equation
ln(Eit) = β0 +β1ln(Mit/Wit)+γ2D2i +...+γnD50i +δ2B2t +...+δTB13t +uit
affected by this?
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