Applied Economics for Business Assignment

Detailed Instructions: Answer all questions. Feel free to use all course material, textbook, etc. to complete this Assignment.

Introduction - You are given a data set (union.dta) to study the factors which may explain wages in a labour market. The data contains information on 545 individuals, where each individual is observed over 8 consecutive years (1980-1987). The total number of observations is 4,360. The data contains the following variables:

Variable - Description

nr - Unique ID of an individual

year - Year

educ - Number of school years

wage - Income earned (1 unit = $1000)

exper - Work experience (#years)

hours - Hours worked in a year

black - =1 if the individual is black

hisp - =1 if the individual is hispanic

married - =1 if the individual is married

union - =1 if individual has union membership

occ1 - Occupation Cateogry 1

occ2 - Occupation Cateogry 2

occ3 - Occupation Cateogry 3

occ4 - Occupation Cateogry 4

occ5 - Occupation Cateogry 5

occ6 - Occupation Cateogry 6

occ7 - Occupation Cateogry 7

occ8 - Occupation Cateogry 8

occ9 - Occupation Cateogry 9

I. Basic Descriptive Statistics

1. What is the median education level in the data?

2. How many unique black individuals (according to race) are in the data? Note that there are multiple observations per individual in the data.

3. Plot a graph of your choice to distinguish the wage distribution among individuals who have union membership versus who do not. Interpret the graph.

4. Compute the median education and median wage levels seperately for all the nine occupation categories (occ1 to occ9).

5. Compare the average education level of individuals who are non-hispanic, married and working in occupation categories 1, 2, 3 or 4 to individuals who are hispanic, married and working in occupation categories 5, 6, 7, 8 or 9.

II. Linear Regression Analysis

log(wage) = β₀  + β₁ union + β₂ educ + β₃exper + β₄hisp + β₅black + error     (1)

1. Estimate a linear regression model with log(wage) as the dependent variable and union, educ, exper, hisp and black as the independent variables (as shown in equation (1)). Interpret and explain the meaning of the coefficients on hisp and exper.

2. Plot a graph of residuals versus work experience (exper) and interpret it.

3. Are the residuals of this regression model normally distributed? Conduct a preliminary test and report your findings. Next, use a formal test to confirm your answer.

4. Compute the elasticity of wages with respect to education at educ=12. Interpret your answer.

5. Predict the average wage for an individual with a union membership (union=1), 15 years of school education (educ=15), 5 years of work experience (exper=5), and whose race is black (black=1 and hisp = 0). Create a 95% confidence interval around the predicted wage.

6. Estimate the regression model in equation (1) after adding a new independent variable: (union x exper). Interpret the estimated coefficient on the new interaction term.

7. Is the relationship between wages and the number of years of work experience, causal? Discuss.

Attachment:- Assignment Files.rar