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Applied economics - Essay Example

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Microeconomic decisions and policy making are economic factors that have been debated upon from the wage differentials and human capital framework points of view. In his theory of wages and profits, Adam Smith stated that labor wages do vary with the labor skills, and ease or…
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Applied economics
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Applied economics

Download file to see previous pages... ucted to establish the functions of human capital earnings and its impacts on the decomposition of the periodic earnings into linear function forms, in which the log of earnings serve as both the function of schooling measure in terms of years of experience in work and other factors representing heterogeneity within a cross-section sample of people observed, and dependent variables. This simple statistical model has however been faced by some limitations, i.e., biasness in the estimation of returns to education and endogeneity in the schooling variables.
As a positively correlated function of the unobserved variable of ability, people with varied ability to work and learn are in most instances a better position to school for longer periods; hence this enhanced ability will have a reflection of higher wages within their occupations. Additionally, existence of a symmetric correlation between any of the independent variables such as schooling and the error term in an OLS regression can consequently lead to bias in the estimates. In this case, effects of ability/heterogeneity have to be random in the sample to avoid positive correlations.
Card (1999) explored the causal relationship of education on earnings, and explicitly the study analysed the heterogeneity between schooling of twins in contrast to their earnings. The assumption in the study was that twins would have the same ability and other external influences so that differences in wages could be more accurately associated with differences in education. Card used the pooled sample of men and women standing up to 198,075 aged from 16 – 66 during the years 1994 to 1996. In this given time frame, the study targeted the differences between individuals having 10, 12 and 16 years of schooling to their returns. An OLS regression analysis was used to inspect the human capital earning with variety of hourly, weekly and annual earnings. The study findings explored an interesting impact of an instrumental factor family ...Download file to see next pagesRead More
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