A researcher estimates an earning function by OLS using a country's Labor Force Survey data for one year. The dataset contains information on 2,000 individuals. The researcher obtained the following regression estimates (with OLS standard errors reported in parentheses)

Ln(w)_i = 0.551 + 0.045E_i + 0.08 S_i - 0.15 F_i + _i

(0.25) (0.01) (0.03) (0.07)

Where Ln(w) is the natural log of the wage; E is years of experience; S is the number of years of schooling, and F is a dummy variable adopting a value of one if the individual is female, and zero if the individual is male.

The researcher computes a RESET test and a Breusch-Pagan test and obtains the following Chi-square values: RESET = 8.57 (distributed as a Chi-square with one degree of freedom); Breusch-Pagan = 1.55 (distributed like a Chi-square with 1 degree of freedom). Explain how these tests are computed. Evaluate the regression model on the basis of these diagnostics. Is there any econometric problem here? If so, what should the next step be for the researcher?

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To evaluate the regression model based on the RESET and BreuschPagan tests we first need to understa... View the full answer