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# EC 303 Quiz 2

Name:______________________________

You have the entire period to complete this quiz.

(1) Consider the following regression results (education = # of years of schooling;
experience = # of years of work experience; tenure = # of years at current job)
from an unknown sample of people.

Table 1
(1) (2) (3)

Ln(wage) Ln(wage) Ln(wage)

Female -.297 -.110 -.227
(.036) (.056) (.168)
Married .213
(.055)
Female x Married -.301
(.072)
Education .080 .079 .082
(.007) (.007) (.008)
Female x Education -.0056
(.0131)
Experience .029 .027 .029
(.005) (.005) (.005)
Experience^2 -.00058 -.00054 -.00058
(.00010) (.00011) (.00011)
Tenure .032 .029 .032
(.007) (.007) (.007)
Tenure^2 -.00059 -.00053 -.00059
(.00023) (.00023) (.00024)
Constant .417 .321 .389
(.099) (.100) (.119)
N 526 526 526

R^2 .441 .461 .441

(a) Considering specification (1), answer the following questions:

(i) What does the coefficient on female indicate (i.e., how would you interpret
this coefficient)?

Holding education, experience, and tenure constant, females earn 29.7% less
than males, on average.
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(ii) What does the coefficient on education indicate (i.e., how would you interpret
this coefficient?

Holding sex, experience, and tenure constant, each additional year of
schooling generates 8% higher wages.

(b) Considering specification (2), answer the following questions:

(i) What does the coefficient on female indicate (i.e., how would you interpret
this coefficient)?

Holding education, experience, and tenure constant, single females earn 11%
than single males.

In order to simplify the explanation, assume the regression equation can be
represented by: Yi = b 0 + b1Female+ b 2 Married+ b 3 Female´ Married

Let’s start by holding married constant and examining what happens as
female changes:

E(Y | female = 0,married = 0) = b 0
E(Y | female = 1,married = 0) = b 0 + b1

Taking the difference between these two equations yields the difference
between single men and single women -- β1

(i) What does the coefficient on married indicate?

Holding education, experience, and tenure constant, married men earn
21.3% more than single men.

Using the same simplifying equation as above, this time, hold female
constant at 0 and examine what happens when we change the married
variable:

E(Y | female = 0,married = 0) = b 0
E(Y | female = 0,married = 1) = b 0 + b 2

Taking the difference between these two equations yields the differences
between single men and married men -- β 2

(ii) What does the coefficient on (Female x Married) indicate?

Holding education, experience, and tenure constant, marriage has a different
effect for women then for men.

E(Y | female = 1,married = 0) = b 0 + b1
E(Y | female = 1,married = 1) = b 0 + b1 + b 2 + b 3
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Taking the difference between these two equations yields the effect of
marriage on females -- β 2 + b 3 . Since β 2 reflects the marriage effect for
males, β 3 reflects the additional effect of marriage on females (beyond the
effect for males).

(c) Considering specification (3), answer the following questions:

(i) In stark contrast to the coefficient on female in specification (1), the
coefficient for female in this regression is not statistically significant. Should
we conclude that there is no statistically significant evidence of lower pay for
women at the same levels of education, experience, and tenure within this
sample? Why or why not?

No, we should not draw such a conclusion. The coefficient is still relatively
large and negative. The standard errors, though, are significantly larger. The
key question to ask, then, is what is driving the increase in standard errors?
The only difference between specification (1) and specification (3) is the
inclusion of the interaction term between female and education. Given the
large degree of collinearity between the female variable and the interaction,
it is not surprising that the standard errors on the female coefficient increase.
This interaction term, though, is insignificant and does not contribute to
increase R^2. Thus, the interaction term is irrelevant and should be
excluded from the regression.

(ii) Does this specification provide support for an argument that the returns to
education are different for men and women within this sample?

No, it does not. The interaction term is small and statistically insignificant.

(d) Do you agree with the analyst’s decision to include both experience and tenure
in the regression? Why or why not? Why do you think the analyst included
quadratic terms for both of these variables?

I think it makes sense. The two variables capture two different determinants of
wages – general job experience (which reflects the acquisition of general human
capital) and firm-specific experience (which reflects the acquisition of firm specific
human capital).

Including quadratic terms for both of these regressors reflects the fact that both
have a non-linear relationship with wages. Early in one’s career, an extra year of
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experience or tenure is likely to generate larger increases in productivity (and thus
wages) than the same change in experience or tenure will during later years.

(e) Do the results in this table provide convincing evidence for or against
discrimination against women in the labor market? Why or why not? If not, what
additional information would you like to have in order to reach a conclusion about
discrimination against women?

No, these results are not very compelling. First, the table includes no description of
the data used to generate this table. Without a better sense of the sample from
which these data were collected, it is difficult to decide how seriously to consider
these results. Second, there are still a number of potentially omitted variables that
may bias these results. For instance, I would like to have data that would allow me
to control for differences in occupational choice or job abilities.

(2) Assume you want to investigate the effects of education spending on housing
prices. You have cross-sectional data containing the average home price and total
school spending per pupil for a cross-section of communities in Oregon.

(a) List 5 additional variables you would add to this regression. Very briefly
discuss why you would want to include each variable.

Primarily, we want to add in variables that may be causing omitted variable bias.
That is, variables that are correlated with both school spending and housing
prices. A partial list includes: average (or median) household income for each
community, a measure of education levels (e.g., the share of people with
bachelors degrees), a measure for the type of community (e.g., urban, suburban,
rural), measures of local economic conditions (e.g., unemployment rates, growth
rates, or, alternatively, regional or county fixed effects).

(b) Write down the regression equation you would estimate if you were
investigating this relationship – including any nonlinearities or transformations.
How would you interpret the coefficient on school spending?

A log-log specification is preferred. This would yield the elasticity of home prices
with respect to school spending.
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(c) Assume that the results of your regression show a positive relationship
between school spending and housing prices that is both economically and
statistically significant.

If an advocate for increasing school spending in Spokane wrote an op-ed that
included an argument, based on your research, that suggested that increasing
school funding would be good for homeowners because it would increase
property values by the amount you found, would you have any problem with this
argument?

There are two main questions to address. First, are the results of this simple
regression internally valid, and, second, are the results externally valid? There
are a number of potential threats to internal validity. It is unlikely that the
simple specification discussed above has included all the potentially omitted
variables. It is also possible that our estimates are plagued by simultaneous
causality bias (i.e., high average housing prices cause increases in school
spending – e.g., via higher property taxes).

Setting concerns about internal validity aside, we still need to worry about
external validity. By citing our results, the advocate is essentially assuming that
the relationship between school spending and housing prices is the same in
Spokane as it is in the average Oregon community. However, Spokane, a
relatively large city, is fairly different from the average Oregon community
(which is likely a relatively small town).

(d) Suppose that instead of data on community level attributes (e.g., average house
prices), you had data from the assessors within a single metropolitan area (e.g.,
Portland-Vancouver) that includes:

• the sales prices of specific homes

• variables that describe the home (e.g., lot size, square feet of the house,
number bedrooms, number of bath rooms, etc.)

• the schools and school district attended by residents of this house

• basic details about the neighborhood (e.g., views, proximity to parks, etc.)

In addition, you can merge the assessor’s data with data you obtain data from the
school and school district about school test scores and spending per pupil.

How could you use these data to obtain a relationship between home prices
and school spending? What regression would you run? What types of
controls would you include? Would you limit the sample of houses examined
to include only houses meeting certain criteria (if so, what criteria would you
use)? Do you think that the evidence from this regression would provide
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stronger support (or better evidence) for the hypothesis that school spending
affects property values?

We can use these data to generate results that are more likely to be internally valid.
A clever approach pursued by economist Sandra Black, restricted the sample of
houses examined to those near school area boundaries. Black’s insight is that
within neighborhoods, the other factors that affect housing prices are constant (e.g.,
crime, general neighborhood amenities (parks, stores, transportation access), the
characteristics of the people in the neighborhood, etc.). As such, comparing similar
houses (e.g., same lot size, same house size, same year built, etc.) in the same
neighborhood on different sides of the street, where one side of the street send
their kids to a better school than the other, yields a fairly clean estimate of what
people are willing to pay to attend a “better” school.