EXP S Ings N EAR: The Output Above Shows The Result of Regressing EARNINGS, Hourly Earnings in Dollars, On

GRAPHING A RELATIONSHIP IN A MULTIPLE REGRESSION MODEL
. reg EARNINGS S EXP
Source | SS df MS Number of obs = 540

-------------+------------------------------ F( 2, 537) = 67.54
Model | 22513.6473 2 11256.8237 Prob > F = 0.0000
Residual | 89496.5838 537 166.660305 R-squared = 0.2010
-------------+------------------------------ Adj R-squared = 0.1980
Total | 112010.231 539 207.811189 Root MSE = 12.91
------------------------------------------------------------------------------
EARNINGS | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
S | 2.678125 .2336497 11.46 0.000 2.219146 3.137105
EXP | .5624326 .1285136 4.38 0.000 .3099816 .8148837
_cons | -26.48501 4.27251 -6.20 0.000 -34.87789 -18.09213
------------------------------------------------------------------------------
EAR Nˆ INGS  26.49  2.68 S  0.56 EXP
The output above shows the result of regressing EARNINGS, hourly earnings in dollars, on
S, years of schooling, and EXP, years of work experience.
1
120
100
Hourly earnings ($)
80
60
40
20
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-20
Years of schooling (highest grade completed)
Suppose that you were particularly interested in the relationship between EARNINGS and S
and wished to represent it graphically, using the sample data.
2
120
100
Hourly earnings ($)
80
60
40
20
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-20
A simple plot would be misleading.
3
120 . cor S EXP

(obs=540)
| S ASVABC
100 --------+------------------
S| 1.0000
Hourly earnings ($)
80 EXP| -0.2179 1.0000
60
40
20
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-20
Schooling is negatively correlated with work experience. The plot fails to take account of
this, and as a consequence the regression line underestimates the impact of schooling on
earnings.
4
120 . cor S EXP

(obs=540)
| S ASVABC
100 --------+------------------
S| 1.0000
Hourly earnings ($)
80 EXP| -0.2179 1.0000
60
40
20
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-20
We will investigate the distortion mathematically when we come to omitted variable bias.
5
120 . cor S EXP

(obs=540)
| S ASVABC
100 --------+------------------
S| 1.0000
Hourly earnings ($)
80 EXP| -0.2179 1.0000
60
40
20
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-20
To eliminate the distortion, you purge both EARNINGS and S of their components related to
EXP and then draw a scatter diagram using the purged variables.
6
. reg EARNINGS EXP

-------------+------------------------------ F( 1, 538) = 2.98
Model | 617.717488 1 617.717488 Prob > F = 0.0847
-------------+------------------------------ Adj R-squared = 0.0037
Total | 112010.231 539 207.811189 Root MSE = 14.389
------------------------------------------------------------------------------
-------------+----------------------------------------------------------------
EXP | .2414715 .1398002 1.73 0.085 -.0331497 .5160927
_cons | 15.55527 2.442468 6.37 0.000 10.75732 20.35321
------------------------------------------------------------------------------
. predict EEARN, resid
We start by regressing EARNINGS on EXP, as shown above. The residuals are the part of
EARNINGS which is not related to EXP. The ‘predict’ command is the Stata command for
saving the residuals from the most recent regression. We name them EEARN.
7
. reg S EXP

-------------+------------------------------ F( 1, 538) = 26.82
Model | 152.160205 1 152.160205 Prob > F = 0.0000
-------------+------------------------------ Adj R-squared = 0.0457
Total | 3204.98333 539 5.94616574 Root MSE = 2.3821
------------------------------------------------------------------------------
S | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
EXP | -.1198454 .0231436 -5.18 0.000 -.1653083 -.0743826
_cons | 15.69765 .4043447 38.82 0.000 14.90337 16.49194
------------------------------------------------------------------------------
. predict ES, resid
We do the same with S. We regress it on EXP and save the residuals as ES.
8
80
60
40
20
0
-8 -6 -4 -2 0 2 4 6
-20
-40
Now we plot EEARN on ES and the scatter is a faithful representation of the relationship,
both in terms of the slope of the trend line (the red line) and in terms of the variation about
that line.
9
80
60
40
20
0
-8 -6 -4 -2 0 2 4 6
-20
-40
As you would expect, the trend line is steeper that in scatter diagram which did not control
for EXP (reproduced here as the black dashed line).
10
. reg EEARN ES
-------------+------------------------------ F( 1, 538) = 131.63
Model | 21895.9298 1 21895.9298 Prob > F = 0.0000
-------------+------------------------------ Adj R-squared = 0.1951
Total | 111392.513 539 206.665145 Root MSE = 12.898
------------------------------------------------------------------------------
EEARN | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
ES | 2.678125 .2334325 11.47 0.000 2.219574 3.136676
_cons | 8.10e-09 .5550284 0.00 1.000 -1.090288 1.090288
------------------------------------------------------------------------------
Here is the regression of EEARN on ES.
11
. reg EEARN ES
-------------+------------------------------ F( 1, 538) = 131.63
Model | 21895.9298 1 21895.9298 Prob > F = 0.0000
-------------+------------------------------ Adj R-squared = 0.1951
Total | 111392.513 539 206.665145 Root MSE = 12.898
------------------------------------------------------------------------------
-------------+----------------------------------------------------------------
ES | 2.678125 .2334325 11.47 0.000 2.219574 3.136676
_cons | 8.10e-09 .5550284 0.00 1.000 -1.090288 1.090288
------------------------------------------------------------------------------
From multiple regression:

------------------------------------------------------------------------------
-------------+----------------------------------------------------------------
S | 2.678125 .2336497 11.46 0.000 2.219146 3.137105
EXP | .5624326 .1285136 4.38 0.000 .3099816 .8148837
_cons | -26.48501 4.27251 -6.20 0.000 -34.87789 -18.09213
------------------------------------------------------------------------------
A mathematical proof that the technique works requires matrix algebra. We will content
ourselves by verifying that the estimate of the slope coefficient is the same as in the
multiple regression.
12
. reg EEARN ES
-------------+------------------------------ F( 1, 538) = 131.63
Model | 21895.9298 1 21895.9298 Prob > F = 0.0000
-------------+------------------------------ Adj R-squared = 0.1951
Total | 111392.513 539 206.665145 Root MSE = 12.898
------------------------------------------------------------------------------
-------------+----------------------------------------------------------------
ES | 2.678125 .2334325 11.47 0.000 2.219574 3.136676
_cons | 8.10e-09 .5550284 0.00 1.000 -1.090288 1.090288
------------------------------------------------------------------------------

------------------------------------------------------------------------------
-------------+----------------------------------------------------------------
S | 2.678125 .2336497 11.46 0.000 2.219146 3.137105
EXP | .5624326 .1285136 4.38 0.000 .3099816 .8148837
_cons | -26.48501 4.27251 -6.20 0.000 -34.87789 -18.09213
------------------------------------------------------------------------------
Finally, a small and not very important technical point. You may have noticed that the
standard error and t statistic do not quite match. The reason for this is that the number of
degrees of freedom is overstated by 1 in the residuals regression.
13
. reg EEARN ES
-------------+------------------------------ F( 1, 538) = 131.63
Model | 21895.9298 1 21895.9298 Prob > F = 0.0000
-------------+------------------------------ Adj R-squared = 0.1951
Total | 111392.513 539 206.665145 Root MSE = 12.898
------------------------------------------------------------------------------
-------------+----------------------------------------------------------------
ES | 2.678125 .2334325 11.47 0.000 2.219574 3.136676
_cons | 8.10e-09 .5550284 0.00 1.000 -1.090288 1.090288
------------------------------------------------------------------------------

------------------------------------------------------------------------------
-------------+----------------------------------------------------------------
S | 2.678125 .2336497 11.46 0.000 2.219146 3.137105
EXP | .5624326 .1285136 4.38 0.000 .3099816 .8148837
_cons | -26.48501 4.27251 -6.20 0.000 -34.87789 -18.09213
------------------------------------------------------------------------------
That regression has not made allowance for the fact that we have already used up 1 degree
of freedom in removing EXP from the model.
14
Copyright Christopher Dougherty 2012.
These slideshows may be downloaded by anyone, anywhere for personal use.

Subject to respect for copyright and, where appropriate, attribution, they may be
used as a resource for teaching an econometrics course. There is no need to
refer to the author.
The content of this slideshow comes from Section 3.2 of C. Dougherty,

Introduction to Econometrics, fourth edition 2011, Oxford University Press.
Additional (free) resources for both students and instructors may be
downloaded from the OUP Online Resource Centre
http://www.oup.com/uk/orc/bin/9780199567089/.
Individuals studying econometrics on their own who feel that they might benefit
from participation in a formal course should consider the London School of
Economics summer school course
EC212 Introduction to Econometrics
http://www2.lse.ac.uk/study/summerSchools/summerSchool/Home.aspx
or the University of London International Programmes distance learning course
EC2020 Elements of Econometrics
www.londoninternational.ac.uk/lse.
2012.10.28

EXP S Ings N EAR: The Output Above Shows The Result of Regressing EARNINGS, Hourly Earnings in Dollars, On

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GRAPHING A RELATIONSHIP IN A MULTIPLE REGRESSION MODEL

. reg EARNINGS S EXP

Source | SS df MS Number of obs = 540

EAR Nˆ INGS  26.49  2.68 S  0.56 EXP

A simple plot would be misleading.

120 . cor S EXP

80 EXP| -0.2179 1.0000

120 . cor S EXP

80 EXP| -0.2179 1.0000

120 . cor S EXP

80 EXP| -0.2179 1.0000

. reg EARNINGS EXP

Source | SS df MS Number of obs = 540

. predict EEARN, resid

Source | SS df MS Number of obs = 540

. predict ES, resid

Here is the regression of EEARN on ES.

From multiple regression:

From multiple regression:

From multiple regression:

These slideshows may be downloaded by anyone, anywhere for personal use.

The content of this slideshow comes from Section 3.2 of C. Dougherty,

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