Consider the model of wages
wagei = β0 + β1educi + β2experi + β3tenurei + ui
where wagei
is the wage of an individual, educi
is his/her years of education, experi
is
his/her total years of working experience and tenurei
is the amount of time the individual
have been in his/her current job, and ui
is an error term.
(a) Your colleague says that there will be a structural break in this model between the
males and females. Explain what this means with specific reference to the variables
in the model.
[5 MARKS]
(b) Outline how you could test your colleague’s statement. There is another variable
available in the data set femalei which takes a value of 1 if a person is female and
zero otherwise.
[10 MARKS]
(c) Your friend has run three versions of the regression
wagei = β0 + β1educi + β2experi + β3tenurei + ui
Once for all individuals (all), once for only females (femalei = 1) and once for males
(femalei = 0). She has emailed you the following information. Use this information
to perform a test for a structural break in the model across gender. Discuss the test
outcome.
Regression SSR Observations
All 4966.03 526
femalei = 1 1257.092 252
femalei = 0 3137.153 274
[10 MARKS]