To assess the feasibility of a guaranteed annual wage (negative income tax), the Rand Corporation conducted a study to assess the response of labor supply (average hours of work) to increasing hourly wages.* The data for this study were drawn from a national sample of 6000 house- holds with a male head earnings less than $15,000 annually. The data were divided into 39 demographic groups for analysis. These data are given in Table 10.14. Because data for four demographic groups were missing for some variables, the data given in the table refer to only 35 de- mographic groups. The de?nitions of the various variables used in the analysis are given at the end of the table.
a. Regress average hours worked during the year on the variables given in the table and interpret your regression.
b. Is there evidence of multicollinearity in the data? How do you know?
c. Compute the variance in?ation factors (VIF) and TOL measures for the various regressors.
d. If there is the multicollinearity problem, what remedial action, if any, would you take?
e. What does this study tell about the feasibility of a negative income tax?