Graded Assignment – Alternative

This assignment accounts for 10% of your grade. It should follow an essay format, which

means you must add an introduction, analysis and conclusion. The word limit of the text is

500. You should add tables as figures to avoid exceeding your word limit. You are encouraged

to use at least Wooldridge (2012) in order to provide references for your tests and rationale.

Your task is to assess the most appropriate specification as displayed in Table 1. Such results

are based on the data from Blackburn and Neumark (1992), which is found as WAGE2 in

Wooldridge (2012). The econometric model is the following:

log(????????????????) = ????0 + ????1???????????????? + ????2???????????????????? + ????3???????????? + ????4???????????? 2 + ????5???????????????????? + ????6???????????????????? + ????

Where wage is measured as monthly earning in U.S. dollars, and it is determined by years of

education, years of experience, age in years and its squared value, if the person is black and

if the person lives in the Standard Metropolitan Statistical Area as a proxy for urban areas.

The weighted least squares (WLS) has a weight of 1/????????????????. The two-stage least squares

(2SLS) uses the following variables as external instruments: mother’s education, father’s

education and number of siblings. You should also assume that those instruments are valid

and relevant.

Table 1: The effects of individual characteristics on wages

Dependent variable lwage


OLS with

robust SE WLS 2SLS

educ 0.064*** 0.064*** 0.066*** 0.114***

exper 0.014*** 0.014*** 0.015*** 0.032***

age -0.010 -0.010 -0.028 -0.121

age2 0.0003 0.0003 0.001 0.002

black -0.241*** -0.241*** -0.233*** -0.167***

urban 0.188*** 0.188*** 0.182*** 0.177***

constant 5.618*** 5.618*** 5.911*** 6.761***

Observations 935 935 935 722

R2 0.206 0.206 0.199 0.155

Adjusted-R2 0.201 0.201 0.194 0.148

F Statistic

(df=6; 928) 40.199*** 40.199*** 38.387*** N/A

Note: *p<0.1;**p<0.05;***p<0.01


First, you must select the most appropriate specification among the four [ordinary least squares (OLS), OLS with robust standard errors, WLS or the 2SLS]. Be specific on the steps

you should, the tests you should perform and their null hypothesis, and the reasoning behind

the decisions you make on the selection process.

Second, after selecting the most appropriate model, you must interpret its results. You must

mention the coefficients, statistical significance, R-squared and F-statistics (if appropriate). Be

precise and explain the meaning and/or null hypothesis of each concept if necessary.


Blackburn, M. L. and Neumark, D. 1992. Unobserved Ability, Efficiency Wages, and Interindustry Wage Differentials:, date last accessed February 1, 2021, at Quarterly Journal of Economics at

Wooldridge, J. M. 2012. Introduction of econometric: a modern approach, South-Western College Pub