Doing an Econometric Project

1. Doing an Econometric Project Or Q4 on the Exam

2. Learning Objectives • Outline how you go about doing your own econometric project • How to answer Q4 on the exam

3. Sample Q4 You are asked to conduct some econometric research in order to answer one of the following economic questions/hypotheses: [list of topics that vary year by year] Choose any one of the above topics and answer each of the following questions: • What sort of data would be needed to answer the question i.e. cross-section or time series or both? What is the unit of observation i.e. individual, firm, country etc? • What sort of variables would need to be in the dataset? What regression would you run? Write down the functional form and variables. Explain your reasoning. • Formulate hypothesis tests that may be useful in assessing the answer to your chosen question. • Briefly discuss any problems that may affect OLS estimates of your regression e.g. serial correlation; heteroscedasticity; multicolinearity etc. • Suggest how the results of your research could be useful to governments (or others) in formulating policy.

4. Some Q4 Topics • Topics from past papers • Public sector workers are more highly paid than private sector workers • A higher stock market will cause the ECB to increase interest rates • The demand for petrol is elastic. • Increase in Income taxes will reduce employment • Increasing growth will lower unemployment • The aggregate production function has constant returns to scale • The return to education is higher for men than women • Fiscal austerity will boost economic growth

5. Doing a project • Q4 on the exam asks you to imagine that you were completing an econometric project to analyse a particular question • Q4 gives you the question and then asks you to outline the various steps that you would undertake in order to answer the questions • For your project, you will come up with your own question • I or other staff members can help you • You could use something from an exam • The steps for both Q4 and the real project are the same • Q4 differs only: • I provide the questions • You have to your imagination and draw on experience with a assignments as well as the lecture notes

6. Not all are Equal • Not all projects or Q4 topics are equal • Some allow good student demonstrate their ability • Each topic has a key element • Can you think of a particular hypothesis test that would address the question? • More than the usual test of significance • Be sure to provide good reasons for your choices • Answers to q4 fall into two groups • Atrocious: waffle, clearly only answered because couldn’t answer the rest • Excellent: integrate the economics and the statistics • Also note that each part doesn’t carry equal marks necessarily, you can compensate across parts

7. Topic 1: Public vs private sector “Public sector workers are more highly paid than private sector workers” • Data For this project we need individual level cross section data. In order to judge whether individual workers get paid more in public or private sector, we need to observe those workers. So aggregate data won’t work. Time series data at individual level wont work unless the individual were moving in and out of the public sector over time – which is most unlikely

8. Variables & Regression We need wages of each individual. We also need to know whether they work in private or public sector. We need other variables that may influence wage e.g. age, education, gender Regression lnW=a1+a2public+a3ed+a4age+e I would probable use logs of wage so that the coeff on public could be interpreted as a percentage difference in wages. Could use the level of the wage in which case the coeff would be a euro amount. The pub variable is a dummy variable so should not be in logs as you cannot take log of zero.

9. Tests As with any regression we would do statistical significance tests on the coeff individually and jointly 1. H0: a2=0 H1: a2<>0 should note this is a t-test and give formula 2. H0: a2=a3=a4=0 H1: not H0 should note this is an f –test and give formula: f=ess/(k-1)/rss/(n-k) Of more interest is a direct test of the question. This implies that a2>0. We can tests this as either the null or alternative. H0:a2>=0 H1: a2<0 For high mark: explain the consequence of H0<=0 instead of H0>=0 in terms to type 1 errors etc and why you would choose one over the other • Note there is no “right” answer to this question. The mark depends on the quality of your explanation

10. Problems • Heteroscedasticity: briefly outline the consequences and the solution • What variable(s) might be causing it: the dummy variable? • Omitted variables: suppose gender left out/ what would happen? • Note • Not expect serial correlation? Why? • Not expect multicollinearity although is possible • Again the there is no right; mark depends on the quality of the explanation

11. Policy The results of this study or of use when negotiating public sector wages. If it is really the case that public sector workers are paid higher wages than private sector workers with the same age and education, then it would be difficult to justify wage increases. • Note endless opportunities for waffle • Don’t! • Key point is why would the answer to question matter? • Will link in with the hypothesis test