Suppose we want to estimate the following wage equation using a sample of young people: wage₁ = Bo+ B₁educi + B₂experi + ẞзage; +ui where wage is hourly wage, educ is years of schooling, exper is years of job experience, and age is the age of individual i. Suppose only a few individuals in the sample have ever been unemployed (or out of labor force). So most individuals have studied at school or worked in their lives. Answer the following questions. (1) What is the problem with the scarcity of unemployment experience? What is likely to happen to the estimation results? (2) If we add a new variable, does the problem stated in (1) matters for the estimation of the coefficient of newly added variable?
Suppose we want to estimate the following wage equation using a sample of young people: wage₁ = Bo+ B₁educi + B₂experi + ẞзage; +ui where wage is hourly wage, educ is years of schooling, exper is years of job experience, and age is the age of individual i. Suppose only a few individuals in the sample have ever been unemployed (or out of labor force). So most individuals have studied at school or worked in their lives. Answer the following questions. (1) What is the problem with the scarcity of unemployment experience? What is likely to happen to the estimation results? (2) If we add a new variable, does the problem stated in (1) matters for the estimation of the coefficient of newly added variable?
Chapter1: Making Economics Decisions
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Transcribed Image Text:Suppose we want to estimate the following wage equation using a sample of young people:
wage₁ = Bo+ B₁educi + B₂experi + ẞзage; +ui
where wage
is hourly wage, educ is years of schooling, exper is years of job experience, and age is the
age of individual i. Suppose only a few individuals in the sample have ever been unemployed (or out of
labor force). So most individuals have studied at school or worked in their lives. Answer the following
questions.
(1) What is the problem with the scarcity of unemployment experience? What is likely to happen to the
estimation results?
(2) If we add a new variable, does the problem stated in (1) matters for the estimation of the coefficient
of newly added variable?
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