School of Economics and Finance Štµepána Lazarová

Queen Mary University of London Semester A, 2023/24

ECN224 ECONOMETRICS 1
Exercise set 2 Week 3
1. A researcher assumes that the following relationship between average
weekly earnings in dollars (AW E) and the age of individual in years
(Age) holds:

AW Ei = 0 + 1 Agei + ui for each i = 1; : : : ; n.

The researcher estimates 0 and 1 by OLS, using a sample of data on

AW E and Age. The procedure gives ^ 0 = 696:7, ^ 1 = 9:6, R2 = 0:023,
and SER = 624:1.

(a) Explain what the coe¢ cient values 696.7 and 9.6 mean.
(b) Is the e¤ect of age on earnings large?
(c) Why should age matter in the determination of earnings? Do the
results suggest that there is a guarantee for earnings to rise for
everyone as they become older? Do you think that the relationship
between age and earnings is linear?
(d) The standard error of the regression (SER) is 624.1. What is its
unit of measurement?
(e) The regression R2 is 0.023. What is its interpretation and unit of
measurement?
(f) What does the regression predict will be the earnings for a 25-year-
old worker? For a 45-year-old worker?
(g) Will the regression give reliable predictions for a 99-year-old worker?
Why or why not?
(h) Given what you know about the distribution of earnings, do you
think it is plausible that the distribution of errors in the regression
is normal?
(i) The average age in this sample is 41.6 years. What is the average
value of Yi in the sample?

1
2. (R) We use LAwages.csv. The data set LAwages.csv contains informa-
tion on 820 workers from Los Angeles who have between 10 and 15
years of work experience. The data set is taken from the 1990 US Cen-
sus of Population. We estimate a wage equation, where hourly wage is
regressed on worker characteristics such as years of experience.

(a) Use only men and regress wage on a constant and years of experi-
ence.
(b) Give an economic interpretation for the estimated parameters.
(c) Obtain a predicted value for each individual. Why does the pre-
dicted value for an individual di¤er from his actual value?
(d) Generate the residual (that is, the di¤erence between the actual
and the predicted value) for each individual. Show that for OLS
the sum of the residual terms is zero.
(e) Labor economists have noticed that when regressing wages on
worker characteristics, the model that best …ts the data is a model
where the dependent variable is the (natural) logarithm of hourly
wages, instead of just hourly wage. First, create a new variable
logwage = log(wage). Again using just men, regress logwage
on exp. Does the coe¢ cient have the expected sign? How can we
interpret the coe¢ cient?
(f) Can you compare R2 of these two regressions to determine which
is a better …t? Why or why not?