One way of estimating the impact of another year of education on individual’s earnings would be to survey individuals about their level of education and earnings and then estimate the following equation
Log Earnings= a + bEducation + e
Where e is an error term that you do not need to worry about.
a) What do labor economists call b? Provide a one sentence definition.
b) What is the magnitude of a typical estimate of b?
c) Economists have found that it is difficult to get a meaningful estimate of b. Why is this task so difficult? Provide 3 reasons.
Some economists have tried to get a better estimate of b by looking at the earnings and education levels of men who graduated from high school during the Vietnam draft era. Describe the “experiment” that economists have used in this context. Why might it be better than estimates of b obtained above? What is one concern about estimates of b that are generated by this “experiment?”