Muhammad Adil

Ms Management (2013-2015)

Using 2SLS indirectly and directly through EViews 6.0

Given are the equations to be used

The variable age is the woman’s age, in years, kidslt6is the number of children less than six
years old, nwifeincis the woman’s nonwage income (which includes husband’s earnings), and
educ and exper are years of education and prior experience, respectively. All variables except
hours and log(wage) are assumed to be exogenous.

Steps

1. First we have to make reduce form of equation for equation 1 & 2.

Reduce Equations:-

hours= π0+ π1educ+ π2age+ π3kidslt6+ π4nwifeinc+ π5exper+ π6exper2+v1………………….. (3)

log (wage)= π7+ π8educ+ π9age+ π10kidslt6+ π11nwifeinc+ π12exper+ π13exper2+v2……….. (4)

For eq 3 we have the following results for LS Method:-

Dependent Variable: HOURS

Method: Least Squares
Date: 12/26/13 Time: 06:05
Sample: 1 753
Included observations: 753

Variable Coefficient Std. Error t-Statistic Prob.  

EDUC 30.55099 12.90127 2.368061 0.0181

AGE -28.41577 4.107315 -6.918333 0.0000
KIDSLT6 -432.9073 58.52656 -7.396767 0.0000
NWIFEINC -3.624902 2.542579 -1.425679 0.1544
EXPER 66.76674 9.939556 6.717275 0.0000
 EXPERSQ -0.705691 0.324747 -2.173049 0.0301
C 1165.677 244.5947 4.765748 0.0000

R-squared 0.263653    Mean dependent var 740.5764

Adjusted R-squared 0.257730    S.D. dependent var 871.3142
S.E. of regression 750.6814    Akaike info criterion 16.08909
Sum squared resid 4.20E+08    Schwarz criterion 16.13208
Log likelihood -6050.543    Hannan-Quinn criter. 16.10565
F-statistic 44.51814    Durbin-Watson stat 1.377124
Prob(F-statistic) 0.000000

For eq 4 we have the following results for LS Method:-

Dependent Variable: LWAGE

Method: Least Squares
Date: 12/26/13 Time: 06:08
Sample (adjusted): 1 428
Included observations: 428 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.  

EDUC 0.101111 0.014962 6.757986 0.0000

AGE -0.002556 0.005192 -0.492325 0.6227
KIDSLT6 -0.053218 0.088441 -0.601740 0.5477
NWIFEINC 0.005560 0.003310 1.679563 0.0938
EXPER 0.041864 0.013238 3.162498 0.0017
EXPERSQ -0.000762 0.000401 -1.902511 0.0578
C -0.447161 0.285203 -1.567870 0.1177

R-squared 0.163302    Mean dependent var 1.190173

Adjusted R-squared 0.151377    S.D. dependent var 0.723198
S.E. of regression 0.666215    Akaike info criterion 2.041812
Sum squared resid 186.8577    Schwarz criterion 2.108199
Log likelihood -429.9477    Hannan-Quinn criter. 2.068031
F-statistic 13.69469    Durbin-Watson stat 1.964394
Prob(F-statistic) 0.000000

Using indirect 2SLS

Equation for this

hours= π14+ π15log(wag)hat+ π16educ+ π17age+ π18kidslt6+ π19nwifeinc+ π20exper+ π21exper2+e1.. (5)

log(wage)= π22+ π23hourshat+ π24educ+ π25age+ π26kidslt6+ π27nwifeinc+ π28exper+ π29exper2+e2.. (6)

For both eq 5 and 6 when we use LS method in eviews it gives error “Near Singular Matrix”.
Using Direct 2SLS in EViews

hours= π0+ π1educ+ π2age+ π3kidslt6+ π4nwifeinc+ π5exper+ π6exper2+v1………………….. (3)

log (wage)= π7+ π8educ+ π9age+ π10kidslt6+ π11nwifeinc+ π12exper+ π13exper2+v2……….. (4)

Equation 3 and 4 will be used for direct 2SLS. In direct 2SLS we cannot use log (wage) and hours
as instrumental variables for equation 3 and 4 respectively, we will use lagged value of
log(wage) and hours and other independent variables as instrumental variables in this case

For equation 3 we have the following results:-

Dependent Variable: HOURS

Method: Two-Stage Least Squares
Date: 12/26/13 Time: 06:30
Sample (adjusted): 2 428
Included observations: 427 after adjustments
Instrument list: LWAGE(-1) EDUC AGE KIDSLT6 NWIFEINC EXPER
        EXPERSQ

Variable Coefficient Std. Error t-Statistic Prob.  

LWAGE 4124.378 7304.890 0.564605 0.5726

EDUC -434.7889 741.8153 -0.586115 0.5581
AGE -5.171849 29.21077 -0.177053 0.8596
KIDSLT6 -75.11516 553.7290 -0.135653 0.8922
NWIFEINC -23.03940 43.13517 -0.534121 0.5935
EXPER -120.9072 310.6117 -0.389255 0.6973
EXPERSQ 2.568564 5.823317 0.441083 0.6594
C 3535.519 3501.468 1.009725 0.3132

R-squared -12.677345    Mean dependent var 1302.211

Adjusted R-squared -12.905845    S.D. dependent var 777.0422
S.E. of regression 2897.633    Sum squared resid 3.52E+09
F-statistic 0.609054    Durbin-Watson stat 2.014794
Prob(F-statistic) 0.748552    Second-Stage SSR 2.21E+08
For equation 4 we have the following results:-

Dependent Variable: LWAGE

Method: Two-Stage Least Squares

Date: 12/26/13 Time: 06:33

Sample (adjusted): 2 428

Included observations: 427 after adjustments

Instrument list: HOURS(-1) EDUC AGE KIDSLT6 NWIFEINC EXPER

        EXPERSQ

Variable Coefficient Std. Error t-Statistic Prob.  

HOURS 0.000496 0.001647 0.301071 0.7635

EDUC 0.109873 0.033851 3.245800 0.0013

AGE 0.005214 0.026447 0.197143 0.8438

KIDSLT6 0.093992 0.503405 0.186713 0.8520

NWIFEINC 0.005607 0.003886 1.443001 0.1498

EXPER 0.016284 0.086108 0.189107 0.8501

EXPERSQ -0.000479 0.001048 -0.456962 0.6479

C -1.284754 2.798629 -0.459066 0.6464

R-squared -0.145626    Mean dependent var 1.190127

Adjusted R-squared -0.164766    S.D. dependent var 0.724045

S.E. of regression 0.781421    Sum squared resid 255.8493

F-statistic 8.546706    Durbin-Watson stat 2.058084

Prob(F-statistic) 0.000000    Second-Stage SSR 186.7956