How much does education affect wage rates? -

# How much does education affect wage rates?

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## Economics Assignment Question

Conduct a simple linear regression analysis to examine the relationship between 'education' (the independent variable) and 'wage' (the dependent variable). Using the Excel data file, prepare a 2000 word report using the following structure:

• Purpose
• Background
• Method
• Results
• Discussion
• Recommendations

1. Obtain summary statistics and histograms for the variables WAGE and EDUC. Discuss the data characteristics
2. Estimate the linear regression WAGE = β1 + β2EDUC + ε and interpret the slope.
3. Calculate the residuals and plot them against EDUC. Are any patterns evident and, if so, what does this mean?
4. Estimate the quadratic regression WAGE = α1 + α2EDUC2 + ε and interpret the results. Estimate the marginal effect of another year of education on wage for a person with 12 years of education, and for a person with 14 years of education. Compare these values to the estimated marginal effect of education from the linear regression in part (b).
5. Construct a histogram of ln(WAGE). Compare the shape of this histogram to that for WAGE from part (a). Which appears to be more symmetric and bell-shaped?

Estimate the log-linear regression ln(WAGE) = γ1 + γ2EDUC + ε and interpret the slope. Estimate the marginal effect of another year of education on wage for a person with 12 years of education, and for a person with 14 years of education. Compare these values to the estimated marginal effects of education from the linear regression in part (b) and quadratic in part (d)

## Economics Assignment Solution

In several studies prior to this, one of the major causes of income inequality has been asserted to be 'disparities in educational attainment'. Higher the education level, higher is the income. This statement has often helped societies to automatically segregate themselves economically even in some of the most advanced economies of the world, for example, the USA where it does not remain constricted to being a mere income effect, but also heavily affects the unemployment rates across groups with different levels of educational attainment. Also, low wages of parents may give rise to the lesser educational attainment of the children which in turn may again lead to low wage. This is a vicious cycle that may have unpleasant impacts on the social fabric. On the other hand, those with higher qualifications may gain easy entry into training programs that can further raise their wages. Thus, the difference in wages can be seen as a premium paid for enhanced skills. However, several studies have also found a weak association or none at all between these two variables. Often, the degree of association differs from country to country due to several local factors.

### Method

We have been given data on Wage and Education for 100 data points or in other words for 100 people chosen randomly from a population. The data is as follows: