Please answer 2 questions a and b 3 Suppose you want to esti

Please answer 2 questions a and b

3. Suppose you want to estimate the following labor supply equation: Annual Work Hours a B (Average Hourly Wage) E You gather data on US workers aged 22 to 55 from the Current Population Survey. You define the Average Hourly Wage as self-reported total annual labor income divided by self-reported total annual work hours. a. Describe in words how to interpret the coefficient B (ignore any concerns about causality for now). b. Give two separate reasons why you might be concerned that B is not a good estimate of the causal effect of a change in the hourly wage a worker faces on the number of hours that they work

Solution

a. Beta is a factor by which Annual work hours will increase for every unit increase in the average hourly wage. In other words, Annual work hours will increase beta times the average hourly wage.

b. When causal effect is taken into consideration, annual work hours can increase because of change in labor policy which can insist on more working hours per week. Or it can be due to change in HR policies which will force the labor to work more to have rapid career growth or other non-monetary benefits..