1 estimate the following regression model that explains wages wage a v
1. Estimate the following regression model that explains wages.
wage = α + β1 education + β2 experience + β3 tenure + e
Have Excel place the output in cell G1 on the worksheet titled Regression 1. Job tenure, by the way, measures how many years a worker has been with their current employer.
Answer questions 1-4 in the other Word document.
2. Now run the same regression but generate the variable Female dummy. Remember that the variable will equal 1 if the person is female, 0 otherwise. To create the dummy variable in column E, you will need to use Excel’s =if( ) function to convert the text variable gender to a numeric female dummy variable.
The function below checks the text in cell K2 and returns the value 1 if the text equals female and 0 otherwise.
Copy the contents of cell E2 all the way down to the bottom of the data.
Now estimate the regression model:
wage = α + β1 education + β2 experience + β3 tenure + β4 female dummy + e
Be sure the female dummy variable data is in column E and adjust the Input X Range appropriately. Have Excel place the output in cell G1 on the worksheet titled Regression 2.
Answer questions 5-7.
3. In columns F, G, H, and I, generate dummy variables indicating the region a given worker resides in (East, South, Midwest, or West). Have Excel place the output in cell G1 on the worksheet titled Regression 3.
wage = α + β1 education + β2 experience + β3 tenure + β4 female dummy +
+ β5 East dummy + β5 South dummy + β5 Midwest dummy + e
Answer questions 8-10.
4. A person’s hourly wage is not likely to increase by a constant amount with additional years of education, experience, or job tenure. But the regression model in part 1 implies that, on average, a person’s wage should increase by $1.79 per hour for each additional year of education they obtain. This finding is probably not realistic, since it suggests that an additional year of graduate school would increase a person’s wage by the same amount as gaining an additional year of high school education.
It would be more realistic to assume that a person’s wage increases by a fixed percentage with each additional year of education. If you transform the dependent variable in a regression model and measure it in logarithmic form, the estimated coefficients should be interpreted as semi-elasticities. In other words, the coefficient estimates tell us the expected percentage change in a person’s wage if they obtain an additional year of education.
Compute the values for the natural logarithm of the wage variable in column L on the Data worksheet. The formula for the natural logarithm operation in Excel is simply:
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