Question

When estimating wage equations we expect that young, inexperienced workers will have relatively low wages and that with additional experience their wages will rise, but then begin to decline after middle age, as the worker nears retirement. This life-cycle pattern of wages can be captured by introducing experience and experience squared to explain the level of wages. If we also include years of education and a dummy variable for the sex (0 if male, 1 if female) we have the following equation:
W AGE = β1 + β2 EDUC + β3 EXPER + β4 EXPER^2 + β5 SEX + e
a. What is the marginal effect of experience on wages?
b. What signs do you expect for each of the coefficients β2, β3, β4 and β5 Why?
c. After how many years of experience do wages start to decline (Since you are not provided with OLS estimates of the regression coefficients, cast your answer in terms of the theoretical coefficients β).

Answer 1

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