PART II: OAXACA DECOMPOSITION (26 points) Problem A: A young economist collects data on hourly wages and years of schooling for 10,000 labor force participants (5000 men and 5000 women). AVERAGE VALUES OF VARIABLES IN THE DATA Hourly wage (W) Years of experience (X) Females $15 20 Males $20 30 He uses these data to estimate separate wage equations for men and women using multiple regression techniques. The form of the wage equations she estimates are: Wm = Bmo + Pmx X + & and Wf= Boo+BEx X + & where the coefficient Bo is the constant term (wages with zero years of experience) and the coefficient By is AW/AX (i.e., "return" to one year of experience). The estimated coefficients from her study are: Bmo= 8, Boo= 5, Pmx= 2/5, and Bex= 1/2 1. Calculate the earnings ratio in the economy under study. (1 point) 2. How much does an additional year of experience add to the average hourly wage of men and women? (1 point) 3. What are the entry wages of men and women? (1 point) 4. Plot the hourly wage profiles of men and women on the same graph. Label all of the intercepts and slopes. Also note the points that correspond to mean hourly wages and schooling for men and women. (2 points) 5. Use the Oaxaca decomposition to calculate the amount and the share of the earning difference that is "explained" by differences in human capital and the share that is "unexplained." (Do this by adding and subtracting Pmx Xf . Make sure to write out how you derived the formula.) (3 points) 6. Now add and subtract BeXx Xm instead. How does this change your answer? What is the intuition for why this changes your answer? (2 points) 7. Provide an explanation for your findings. What is the meaning of the results of the Oaxaca decomposition you performed? (In answering this, try to explain the approach and your key findings to someone like a journalist.) (3 points)