Applied Econometrics for

HRM2021-23

P. C. Padhan
pcpadhan@xlri.ac.in
Introduction to Econometrics?

1. What is Econometrics?

2. Why Econometrics?

3. The Stages of Econometric Work

4. Data and Variable Selection

5. Causality and the notion of ceteris paribus in econometric

analysis
What is Econometrics?

➢ Founder of Econometrics:
o Pawel Ciompa (1910) in his work “Zarys ekonometryi i teorya buchalteryi”
or Outline of econometrics and the theory of bookkeeping, published in Lviv
in 1910.

➢ Father of Modern Econometrics:

o Ragnar Frisch (first Nobel Prize winners in Economics) and Jan Tinbergen

➢ Founders of Econometric Society:

o Fredric C Mills and Charles C Roose
o During 1930s and 1940s foundation of the Econometric Society and Cowles
Commission.
What is Econometrics?

➢ Define
o Etymologically Greek Word: oikonomia (administration or economics) and
metron, (measure))

o A set of techniques and methods use to answer (generally) economic questions

with data.

o The importance of applied work in economics( and related field) is increasing

constantly.

o Theory suggests that X affects Y but is this true or not?

What is Econometrics?

Econometrics
Economics

Statistics Mathematics
What is Econometrics?
Why a separate discipline?
Economic theory
• makes statements that are mostly qualitative in nature,
• while econometrics gives empirical content to most economic theory

Mathematical economics
• express economic theory in mathematical form without empirical verification of
the theory,
• while econometrics is mainly interested in the later

Economic statistics
• mainly concerned with collecting, processing and presenting economic data.
• Not concerned with using the collected data to test economic theories

Mathematical statistics
• provides many tools for economic studies,
• While econometrics supplies the later with many special methods of
quantitative analysis based on economic data
Why Econometrics?

➢ Econometrics is(almost) every where?

o Will corporate tax cut benefit the middle class?
o The economics of having a baby at home?
o The effect of class size on education and wages

o Does immigration cause lower wages and higher unemployment for locals?

o Does raising the minimum wage cause reduced employment for the low-
skilled?

o Does more education cause higher wages better jobs?

o Does higher public debt levels cause lower economic growth ?

o Does birth order cause different education and employment outcomes?

Why Econometrics for HR?

➢ HR Professional
o Why is employee productivity decreasing ?
o Why aren’t they able to meet their targets ?
o Why don’t they feel motivated enough ?
o How is it affecting your company’s bottom line ?
o How to fix the salary of employee?
o Why attrition rate is very high in the company?
Why Econometrics for HR?

➢ HR Professional
o Whether age of an employee has a substantial effect on their
maturity.

o The importance of IQ (Intelligence Quotient) vs. EQ

(Emotional Quotient) on problem handling capability.

o How sedentary lifestyle at workplace affects employee output.

o Is a specific physical activity makes employees more energetic

and lively at the workplace.
Stages of Econometric Analysis
1. Think about a Problem under consideration

(Choice of relevant variable)

2. Data:

(Obtain, organize and clean data on relevant variables)

3. Specification of model

o Mathematical

o Econometric

(start with simple model and than go for complicated one)

4. Estimate the model: different methods

5. Robust result:

(Diagnostic Checking / Model validation and Criticism)

6. Forecasting / Prediction

6. Using the Chosen model(s) for the solution of the posed problems.
Stages of Econometric Analysis
Example-1: Keynesian Theory of Consumption

A. Statement of theory or hypothesis:

‘ The fundamental psychological law…is that men (women) are disposed , as a

rule and on an average, to increase their consumption as their income increases,
but not as much as the increase in their income’.

Marginal propensity to consume (MPC)

0<MPC<1
Stages of Econometric Analysis
A. Cross-Section Data B. Time Series Data

➢ Data on a large number of individual units ❖ Data on one particular individual (eg. Individual, firms, household,
(individual, firms, household, government, government, country etc ) over a long period of time. Variations comes
from variation over time.
country or object etc) collected at a given
point of time. Variation comes from ❖ Notations:
individuals (Yt for t= 1,2,3…..T)
Notations: ➢ Decennially : Once in 10 yrs. (census of population)

Yi for i=1,2….N ➢ Quinquennially : Once in 5 yrs. (census of manufacture)

➢ Annual : GDP, revenue, expenditure, sales, advertisement
e.g. Data on the share prices of N=100
companies ➢ Monthly : Unemployment rate , CPI
➢ Weakly : Money supply
Data on monthly salaries of CEOs of N=200
firms ➢ Daily : Stock price, weather repots
➢ Per minute : pulse rate, heart bit

C. Pooled /Panel Data

➢ Data on large no. of individuals over a period of time.
➢ Combination of time series and cross section data.
Notations:
Yit for i=1,2…..N, and t=1,2………T
e.g. Exchange rate for N countries for last T months or, N Household’s expenditure for T periods
N Firm’s investment expenditure for T periods or N Firms sales for T period
D. Panel, Longitudinal or Micropanel Data
Here same cross sectional units ( ex. Family or firm) surveyed over time.
Stages of Econometric Analysis
Stages of Econometric Analysis
B. Data Collection
Year Y X
2001 3081.5 4620.3
2002 3240.6 4803.7
2003 3407.6 5140.1
2004 3566.5 5323.5
2005 3708.7 5487.7
2006 3822.3 5649.5
2007 3972.7 5865.2
2008 4064.6 6062
2009 4132.2 6136.3
2010 4105.8 6079.4
2011 4219.8 6244.4
2012 4343.6 6389.6
2013 4486 6610.7
2014 4595.3 6742.1
2015 4714.1 6928.4
Stages of Econometric Analysis

C . Specification of the mathematical D. Specification of the Econometric

model: model

Y = 1 +  2X; 0   2 1 Y = 1 +  2X + u
Mathematical model represents an exact Econometric model represents inexact or
or deterministic relationship between Y probabilistic relationship between Y and
and X X

• ß1 and ß2 are parameters; • u is the disturbance or random error term

•ß1 is intercept, and ß2 is slope ‘u’ is a random (stochastic) variable
coefficients
• Linear regression model
Y=Total Compensation and X=Total
Revenue
Stages of Econometric Analysis

2=MPC

1

X
Stages of Econometric Analysis
E. Estimation of the Model OLS, GMM, GLS, Bayesian etc.

Yˆi = −184.08 + 0.7064 X i β2=0.706

F. Hypothesis Testing
Are the estimates accord with the expectations of the theory that
is being tested? Is β2<1 statistically
Z, t, F,  2 tests
G. Prediction/Forecasting :With given future value(s) of X, what is the
future value(s) of Y?
If X= 6000, Y=-184.08+0.7064(6000)=4054.32
H. Policy Analysis/ Implications
If Y=4000, X=? X= 59323.103
By policies of the Company can manipulate the control variable
X to get the desired level of target variable Y
Econometric Model: Examples 1
• Economic model of crime (Becker (1968))
– Derives equation for criminal activity based on utility maximization

Hours spent in
criminal activities

Age
“Wage” of cri-
minal activities Wage for legal Probability of Expected
Other Probability of conviction if sentence
employment
income getting caught caught

– Functional form of relationship not specified

– Equation could have been postulated without economic modeling
Econometric Model: Examples 1
• Econometric model of criminal activity
– The functional form has to be specified
– Variables may have to be approximated by other quantities

Measure of cri- Wage for legal Other Frequency of

minal activity employment income prior arrests
Unobserved deter-
minants of criminal
activity

e.g. moral character,

wage in criminal activity,
Frequency of Average sentence Age family background …
conviction length after conviction
Econometric Model: Examples 2
• Economic model of job training and worker productivity

– What is effect of additional training on worker productivity?

– Formal economic theory not really needed to derive equation:

Hourly wage

Years of formal
education Weeks spent
Years of work- in job training
force experience

– Other factors may be relevant, but these are the most important (?)
Econometric Model: Examples 2
• Econometric model of job training and worker productivity

Unobserved deter-
minants of the wage

e.g. innate ability,

Hourly wage Years of formal Years of work- Weeks spent quality of education,
education force experience in job training family background …

• Most of econometrics deals with the specification of the error

• Econometric models may be used for hypothesis testing
– For example, the parameter represents “effect of training on wage”
– How large is this effect? Is it different from zero?
Thank You