(a) You want to estimate the effect of the logarithm of wages on the hours of...

 

 

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(a) You want to estimate the effect of the logarithm of wages on the hours of work supplied by married women already in the workforce. The labor demand function is the second part of the system that determines wages and hours of work of married women in the labour force. The two structural equations are: In(wage) = 1 + Bhours + B3educ + Bixper+u (1) and hours = a + aln(wage) + akids6 + a4nlincome + u2 where In (wage) is the natural log of wage, hours is hours of work, educ is years of education, exper is years of experience, kids6 is number of dependent children in the household under the age of 6, and nlincome is non-labour income (for example the husband's income, rent, benefits, etc). If you ignore equation (2) and esti- mate only equation (1) using OLS, what kind of issues will the least squares estimator of the effect of hours (i.e. 2) suffer from and why? (b) What are the order and rank conditions for identification of a two- equation simultaneous equations model? What is the rank condition for identifying equation (2) above? (c) What is a reduced-form equation? Write the reduced form equation for log(wage) for the two-equations simultaneous equations model above. Suggest an estimation procedure that will provide consistent esti- mates of the parameters for the wage equation. Explain step by step how the estimation will be carried out. (a) You want to estimate the effect of the logarithm of wages on the hours of work supplied by married women already in the workforce. The labor demand function is the second part of the system that determines wages and hours of work of married women in the labour force. The two structural equations are: In(wage) = 1 + Bhours + B3educ + Bixper+u (1) and hours = a + aln(wage) + akids6 + a4nlincome + u2 where In (wage) is the natural log of wage, hours is hours of work, educ is years of education, exper is years of experience, kids6 is number of dependent children in the household under the age of 6, and nlincome is non-labour income (for example the husband's income, rent, benefits, etc). If you ignore equation (2) and esti- mate only equation (1) using OLS, what kind of issues will the least squares estimator of the effect of hours (i.e. 2) suffer from and why? (b) What are the order and rank conditions for identification of a two- equation simultaneous equations model? What is the rank condition for identifying equation (2) above? (c) What is a reduced-form equation? Write the reduced form equation for log(wage) for the two-equations simultaneous equations model above. Suggest an estimation procedure that will provide consistent esti- mates of the parameters for the wage equation. Explain step by step how the estimation will be carried out.

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a If you ignore equation 2 and estimate only equation 1 using OLS the least squares estimator of the ... View the full answer