Suppose you want to estimate a wage equation for married women of the form

where WAGE is the hourly wage, \(H O U R S\) is number of hours worked per week, EDUC is years of education, and EXPER is years of experience. Your classmate observes that higher wages can bring forth increased work effort, and that married women with small children may reduce their hours of work to take care of them. It may also be true that a husband's wage rate has an effect on a wife's hours of work supplied, so that there may be an auxiliary relationship such as

where KIDS is the number of children under the age of six in the woman's household and HWAGE is her husband's wage rate.

a. Can the wage equation be estimated satisfactorily using the OLS estimator? If not, why not?

b. Is the wage equation "identified"? What does the term identification mean in this context?

c. If you seek an alternative to least squares estimation for the wage equation, suggest an estimation procedure and how (step by step, and NOT a computer command) it is carried out.

d. Other than the identification condition in part (b), are there any other conditions that must be met so that we can confidently use the estimation procedure in part (c)? What are those conditions?

Transcribed Image Text:

In(WAGE) = B +HOURS + 3EDUC + EXPER + BEXPER + e