De La Salle University- Manila

School of Economics
Economics Department



Panel Data Regression towards Wage and its Determinants of
Education, Working Weeks, and Years of Full Time Working


An Empirical Paper
Submitted to Mr. Chris Cabuay




In Partial Fulfilment
Of the Requirements in
LBYMET2 V24





Centeno, Alexander M.
June 21, 2014







I. Introduction
Wage is a very important thing in life as people tend to get older. It is really from our jobs after
graduating in college, where the source of income could be attained. Wage is important as it will help
with daily expenses or monthly fees such as water, electricity, and utilities. Wage has a lot of factors that
affect how that income could decrease or increase what is given to an individual. It is now very
significant to see how what affects wage as inflation increases and prices increase it would be harder to
budget the money from hardworking time in the office. It is best to see fit what affects to have a better
wage for future references. The dataset used is from PSID wage data 1976-82 from Baltagi and Khanti-
Akom (1990)
Objectives
To know what factors increase/decrease of wage. The objectives of this empirical analysis are as follows:
- To know whether education influences wage
- To know whether weeks worked influences wage
- To know whether experience influences wage
II. Conceptual and Operational Framework of the Study
-Human Capital Investment
It is the attributes of a person or educational attainment that there is an investment of a return
of high wage due to high educational attainment or high quality attributes. It can also be argued
that there is also higher productivity towards human capital as it can have the potential to be a
resource for development.
-Economic/Income Mobility
This is the ability for an individual to get a higher economic status in the world which also works
vice versa, demoting someone from his high economics status. This is related with the ability to
generate value that can be measured in income or in jobs would be wages. Since people strive
to have a better economic status then they would educate themselves more and work more and
lastly, get more experience that could affect their wages. From here economic opportunities can
arise





III. Results and Discussion
These models were used from the program of STATA12 to inherit models of the NAVE, Fixed effects,
Random Effects, M1, M2, M3, and M4. These are obtained to see which model is best used for
explaining the determinants.
. reg lwage exp wks ed

Source | SS df MS Number of obs = 4165
-------------+------------------------------ F( 3, 4161) = 467.07
Model | 223.425816 3 74.4752721 Prob > F = 0.0000
Residual | 663.479085 4161 .159451835 R-squared = 0.2519
-------------+------------------------------ Adj R-squared = 0.2514
Total | 886.904902 4164 .212993492 Root MSE = .39931

------------------------------------------------------------------------------
lwage | Coef. Std. Err. t P>|t| [95% Conf. Interval]
Variable A-priori sign Variable Definition or Economic intuition
Dependent
Wage It is the income of a person
Independent
Education
+
It is the educational attainment of an
individual. It is positive due to a higher value
perspective that with more education leads to
higher wages We see this as a human capital
investment that more education could lead to
higher return of wages.
Weeks
Worked
+
It is how much a person is working in weeks. It
is positive because the return would be higher
due to overtime work on the job and that
return will also be higher because the
contribution of an individual was higher as
well. Income mobility that one has the ability
to move and work more to get a higher
economic status.
Experience
+
It is the work experience of an individual. With
more work experience you tend to have more
knowledge towards the work that is done by
an individual.
-------------+----------------------------------------------------------------
exp | .0131608 .0005786 22.75 0.000 .0120264 .0142951
wks | .0064961 .0012073 5.38 0.000 .0041292 .008863
ed | .0765796 .0022746 33.67 0.000 .0721202 .0810391
_cons | 5.127268 .0667767 76.78 0.000 4.99635 5.258186
------------------------------------------------------------------------------
This is the fixed effects model
. xtreg lwage exp wks ed,fe
note: ed omitted because of collinearity

Fixed-effects (within) regression Number of obs = 4165
Group variable: id Number of groups = 595

R-sq: within = 0.6508 Obs per group: min = 7
between = 0.0251 avg = 7.0
overall = 0.0440 max = 7

F(2,3568) = 3325.13
corr(u_i, Xb) = -0.9142 Prob > F = 0.0000

------------------------------------------------------------------------------
lwage | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
exp | .0969388 .001189 81.53 0.000 .0946077 .09927
wks | .0011433 .0006033 1.90 0.058 -.0000396 .0023262
ed | 0 (omitted)
_cons | 4.698224 .0369345 127.20 0.000 4.62581 4.770639
-------------+----------------------------------------------------------------
sigma_u | 1.0575523
sigma_e | .15346359
rho | .97937676 (fraction of variance due to u_i)
------------------------------------------------------------------------------
F test that all u_i=0: F(594, 3568) = 57.17 Prob > F = 0.0000
This is the random effects model
Random-effects GLS regression Number of obs = 4165
Group variable: id Number of groups = 595

R-sq: within = 0.6503 Obs per group: min = 7
between = 0.1524 avg = 7.0
overall = 0.1626 max = 7

Wald chi2(3) = 2792.35
corr(u_i, X) = 0 (assumed) Prob > chi2 = 0.0000

------------------------------------------------------------------------------
lwage | Coef. Std. Err. z P>|z| [95% Conf. Interval]
-------------+----------------------------------------------------------------
exp | .0570861 .0011033 51.74 0.000 .0549236 .0592486
wks | .0015308 .000753 2.03 0.042 .0000551 .0030066
ed | .1142181 .0062162 18.37 0.000 .1020346 .1264016
_cons | 4.004136 .0946092 42.32 0.000 3.818705 4.189566
-------------+----------------------------------------------------------------
sigma_u | .32612592
sigma_e | .15346359
rho | .81871127 (fraction of variance due to u_i)

Since the p<0.05 (Chi2 very high), we reject Ho: difference not systematic (REM). Thus, the differences in
coefficients are systematic; so the model is FEM.
M1
. xi:reg lwage exp wks ed i.id
i.id _Iid_1-595 (naturally coded; _Iid_1 omitted)
note: _Iid_468 omitted because of collinearity

Source | SS df MS Number of obs = 4165
-------------+------------------------------ F(596, 3568) = 57.20
Model | 802.874676 596 1.34710516 Prob > F = 0.0000
Residual | 84.0302256 3568 .023551072 R-squared = 0.9053
-------------+------------------------------ Adj R-squared = 0.8894
Total | 886.904902 4164 .212993492 Root MSE = .15346

------------------------------------------------------------------------------
lwage | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
exp | .0969388 .001189 81.53 0.000 .0946077 .09927
wks | .0011433 .0006033 1.90 0.058 -.0000396 .0023262
ed | -.2936449 .0116674 -25.17 0.000 -.3165202 -.2707695
_Iid_2 | -1.489512 .0770734 -19.33 0.000 -1.640625 -1.3384
_Iid_3 | 1.12133 .0731142 15.34 0.000 .9779801 1.26468
_Iid_4 | -2.010195 .0824305 -24.39 0.000 -2.171811 -1.84858
_Iid_5 | 2.305758 .0830858 27.75 0.000 2.142858 2.468659
_Iid_6 | -.2299663 .0726335 -3.17 0.002 -.3723738 -.0875589
_Iid_7 | .0526864 .0718865 0.73 0.464 -.0882563 .1936291
_Iid_8 | -1.031817 .0798031 -12.93 0.000 -1.188282 -.875353
_Iid_9 | 2.976028 .086456 34.42 0.000 2.80652 3.145536
_Iid_10 | 2.596364 .0864953 30.02 0.000 2.426779 2.765949
-more-
M2
. xi:reg lwage exp wks ed i.t
i.t _It_1-7 (naturally coded; _It_1 omitted)

Source | SS df MS Number of obs = 4165
-------------+------------------------------ F( 9, 4155) = 294.57
Model | 345.467312 9 38.3852569 Prob > F = 0.0000
Residual | 541.43759 4155 .130309889 R-squared = 0.3895
-------------+------------------------------ Adj R-squared = 0.3882
Total | 886.904902 4164 .212993492 Root MSE = .36098

------------------------------------------------------------------------------
lwage | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
exp | .0101228 .0005324 19.01 0.000 .0090789 .0111666
wks | .0062434 .0010934 5.71 0.000 .0040996 .0083871
ed | .0739691 .002058 35.94 0.000 .0699342 .078004
_It_2 | .0752991 .020952 3.59 0.000 .034222 .1163762
_It_3 | .1965239 .0209741 9.37 0.000 .1554033 .2376444
_It_4 | .28485 .0210161 13.55 0.000 .2436472 .3260528
_It_5 | .3665395 .0210528 17.41 0.000 .3252647 .4078143
_It_6 | .4354559 .0211054 20.63 0.000 .3940779 .4768339
_It_7 | .5137642 .0211731 24.26 0.000 .4722536 .5552749
_cons | 4.965459 .0611313 81.23 0.000 4.845609 5.085309
Since the p < 0.05 (F is very high), there is a significant difference in the RSS of Naive and M2,
we will reject Ho: Naive. Therefore the M2 is better.

. xi:reg lwage exp wks ed i.id i.t
i.id _Iid_1-595 (naturally coded; _Iid_1 omitted)
i.t _It_1-7 (naturally coded; _It_1 omitted)
note: _Iid_34 omitted because of collinearity
note: _Iid_468 omitted because of collinearity

Source | SS df MS Number of obs = 4165
-------------+------------------------------ F(601, 3563) = 57.33
Model | 803.78519 601 1.33741296 Prob > F = 0.0000
Residual | 83.1197117 3563 .023328575 R-squared = 0.9063
-------------+------------------------------ Adj R-squared = 0.8905
Total | 886.904902 4164 .212993492 Root MSE = .15274

------------------------------------------------------------------------------
lwage | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
exp | .0033417 .0018765 1.78 0.075 -.0003374 .0070208
wks | .0009485 .0006024 1.57 0.115 -.0002325 .0021295
ed | .1395169 .0086985 16.04 0.000 .1224624 .1565714
_Iid_2 | .1701199 .0672362 2.53 0.011 .0382945 .3019452
_Iid_3 | .1051404 .0811436 1.30 0.195 -.0539522 .2642329
_Iid_4 | .1793675 .0679188 2.64 0.008 .0462037 .3125312
_Iid_5 | -.0693575 .0911859 -0.76 0.447 -.2481394 .1094244
_Iid_6 | .6248975 .0673745 9.27 0.000 .492801 .756994
_Iid_7 | -.1217406 .0728301 -1.67 0.095 -.2645336 .0210523
_Iid_8 | .4093019 .068189 6.00 0.000 .2756086 .5429952
_Iid_9 | -.054073 .098869 -0.55 0.584 -.2479186 .1397727
_Iid_10 | -.4346557 .0987562 -4.40 0.000 -.6282801 -.2410312
_Iid_11 | .4714686 .0679183 6.94 0.000 .3383059 .6046312
_Iid_12 | .3140958 .069145 4.54 0.000 .1785281 .4496635
_Iid_13 | .6953603 .0674009 10.32 0.000 .5632121 .8275085
_Iid_14 | -.1401122 .0916831 -1.53 0.127 -.3198688 .0396445
_Iid_15 | -.5148368 .0835797 -6.16 0.000 -.6787057 -.3509679
-more-
Since the p < 0.05 (F is very high), there is a significant difference in the RSS of Naive and M3;
hence, we will reject Ho: Naive. Therefore, the M3 is better.
xttest0

Breusch and Pagan Lagrangian multiplier test for random effects

lwage[id,t] = Xb + u[id] + e[id,t]

Estimated results:
| Var sd = sqrt(Var)
---------+-----------------------------
lwage | .2129935 .4615122
e | .0235511 .1534636
u | .1063581 .3261259

Test: Var(u) = 0
chibar2(01) = 5169.64
Prob > chibar2 = 0.0000
hausman model1 model2

---- Coefficients ----
| (b) (B) (b-B) sqrt(diag(V_b-V_B))
| model1 model2 Difference S.E.
-------------+----------------------------------------------------------------
exp | .0969388 .0570861 .0398527 .0004431
wks | .0011433 .0015308 -.0003876 .
ed | -.2936449 .1142181 -.4078629 .0098735
------------------------------------------------------------------------------
b = consistent under Ho and Ha; obtained from regress
B = inconsistent under Ha, efficient under Ho; obtained from xtreg

Test: Ho: difference in coefficients not systematic

chi2(3) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 1475.61
Prob>chi2 = 0.0000
(V_b-V_B is not positive definite)

IV. Conclusion
Overall there are a lot of models that can be used for explaining the determinants that influence
wage. But from comparing all models the best is one is LSDV-M3 with a high explaining power with an R-
squared of 0.9063. Even though the model suffers from multicollinearity, omitted variable bias, and non-
normality of residuals, it is still the best model because it accounts for the unobserved heterogeneity.
Based on the results with LSDV-M3, within experience for every 1 unit change then there is a
coefficient of .0033417 which is a percent change of .33417%. Though we know that experience could
be a good factor on how wages are affected the P-value of 0.075 which is higher than 0.05 then it
becomes insignificant. Next which is weeks worked, which has a coefficient of .0009485 which is a
percent change of .09485 % for every 1 unit change in wage. Even though it is stated that there is a
contribution to effort on how much work is put in to the office the p-value states it is highly insignificant
with a value of 0.115 which is higher than 0.05. Lastly is education with a coefficient of .1395169 which
is 13.95169 % for every 1 unit change in wage. The p value is 0.000 which is less than 0.05 which makes
it significant and this is true because due to human capital investment, the higher your education
attainment is the higher youre wage will be. The more knowledge you know the better value you will
have for a company and for an office that is why wage also increases.
Policy recommendations suggest that we should look into education attainment and how it
should be a factor in determining wages. Then we should invest now on education in attaining it to have
higher wages that could be attained in the work field. Though experience and works needed are
insignificant we should still look into these because even with just education there are still others factors
that could be accounted for and thus education will not be only the factor determining how wage would
turn out to be. More data and more researchers should be done on this topic to enhance the idea that
education helps influence wages and other factors as well.

V. References
Basic Theory of Human Capital. (n.d.).Basic Theory of Human Capital. Retrieved July 19, 2014, from
http://econ.lse.ac.uk/staff/spischke/ec533/A
Flatau, P. (n.d.). Hickss The Theory Of Wages: Its Place in the History of Neoclassical Distribution
Theory. Hickss The Theory Of Wages: Its Place in the History of Neoclassical Distribution Theory.
Retrieved July 18, 2014, from http://www.hetsa.org.au/pdf/36-A-04.pdf
Huff, R. (n.d.). human capital (economics). Encyclopedia Britannica Online. Retrieved July 19, 2014, from
http://www.britannica.com/EBchecked/topic/275598/human-capital
Black, K., & Jones, A. (2014, June 12). What Is Income Mobility?. WiseGeek. Retrieved July 19, 2014,
from http://www.wisegeek.com/what-is-income-mobility.htm
WEAKONOMICS. (n.d.). What Is Economic Mobility?. Retrieved July 19, 2014, from
http://weakonomics.com/2010/06/08/weakon-329-economic-mobilit/
Stiglitz, J. E. (1974). Alternative Theories of Wage Determination and Unemployment in LDC's: The Labor
Turnover Model. The Quarterly Journal of Economics, 88(2), 194