The following model allows the return to education to depend upon the total amount of both parents' education, called pareduc: log(wage) = Bo + Bjeduc + Bzeduc-pareduc + Bzexper + Butenure + u. (i) Show that, in decimal form, the return to another year of education in this model is Alog(wage)/Aeduc = ßi + Brpareduc. What sign do you expect for B,? Why? (ii) Using the data in WAGE2, the estimated equation is log(wage) = 5.65 + .047 educ + .00078 educ-pareduc + (.13) (.010) (.00021) .019 exper + .010 tenure (.004) (.003) n = 722, R = .169. (Only 722 observations contain full information on parents' education.) Interpret the coefficient on the interaction term. It might help to choose two specific values for pareduc-for example, pareduc = 32 if both parents have a college education, or pareduc = 24 if both parents have a high school education-and to compare the estimated return to educ. (iii) When pareduc is added as a separate variable to the equation, we get: log(wage) = 4.94 + .097 educ + .033 pareduc – .0016 educ-pareduc (.017) + .020 exper + .010 tenure (.003) (.38) (.027) (.0012) (.004) n = 722, R? = .174. Does the estimated return to education now depend positively on parent education? Test the null hypothesis that the return to education does not depend on parent education.
The following model allows the return to education to depend upon the total amount of both parents' education, called pareduc: log(wage) = Bo + Bjeduc + Bzeduc-pareduc + Bzexper + Butenure + u. (i) Show that, in decimal form, the return to another year of education in this model is Alog(wage)/Aeduc = ßi + Brpareduc. What sign do you expect for B,? Why? (ii) Using the data in WAGE2, the estimated equation is log(wage) = 5.65 + .047 educ + .00078 educ-pareduc + (.13) (.010) (.00021) .019 exper + .010 tenure (.004) (.003) n = 722, R = .169. (Only 722 observations contain full information on parents' education.) Interpret the coefficient on the interaction term. It might help to choose two specific values for pareduc-for example, pareduc = 32 if both parents have a college education, or pareduc = 24 if both parents have a high school education-and to compare the estimated return to educ. (iii) When pareduc is added as a separate variable to the equation, we get: log(wage) = 4.94 + .097 educ + .033 pareduc – .0016 educ-pareduc (.017) + .020 exper + .010 tenure (.003) (.38) (.027) (.0012) (.004) n = 722, R? = .174. Does the estimated return to education now depend positively on parent education? Test the null hypothesis that the return to education does not depend on parent education.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:The following model allows the return to education to depend upon the total amount of both parents'
education, called pareduc:
log(wage) = Bo + Bjeduc + Bzeduc-pareduc + Bzexper + Butenure + u.
(i) Show that, in decimal form, the return to another year of education in this model is
Alog(wage)/Aeduc = ßi + Brpareduc.
What sign do you expect for B,? Why?
(ii) Using the data in WAGE2, the estimated equation is
log(wage) = 5.65 + .047 educ + .00078 educ-pareduc +
(.13) (.010)
(.00021)
.019 exper + .010 tenure
(.004)
(.003)
n = 722, R = .169.
(Only 722 observations contain full information on parents' education.) Interpret the coefficient
on the interaction term. It might help to choose two specific values for pareduc-for example,
pareduc = 32 if both parents have a college education, or pareduc = 24 if both parents have a
high school education-and to compare the estimated return to educ.
(iii) When pareduc is added as a separate variable to the equation, we get:
log(wage) = 4.94 + .097 educ + .033 pareduc – .0016 educ-pareduc
(.017)
+ .020 exper + .010 tenure
(.003)
(.38) (.027)
(.0012)
(.004)
n = 722, R? = .174.
Does the estimated return to education now depend positively on parent education? Test the null
hypothesis that the return to education does not depend on parent education.
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