The labor supply of married women has been a subject of a great deal of economic research. Consider the following supply equation specification

where HOURS is the supply of labor, WAGE is hourly wage, EDUC is years of education, KIDSL6 is the number of children in the household who are less than 6 years old, and NWIFEINC is household income from sources other than the wife's employment.

a. Discuss the signs you expect for each of the coefficients.

b. Explain why this supply equation cannot be consistently estimated by OLS regression.

c. Suppose we consider the woman's labor market experience EXPER and its square, EXPER \({ }^{2}\), to be instruments for WAGE. Explain how these variables satisfy the logic of instrumental variables.

d. Is the supply equation identified? Explain.

e. Describe the steps [not a computer command] you would take to obtain IV/2SLS estimates.

Transcribed Image Text:

HOURS = B + B WAGE + B3EDUC + B4AGE + B, KIDSL6+ BNWIFEINC + e