Question: You have been asked to study pay equity in the market place, in particular, if there is any evidence of discrimination in salaries paid to persons of similar qualifications in the United States. Download the file with data on “Salaries”. The file contains a sample of the data that have been collected by the Bureau of Labor Statistics for a specific year. The following variables are included:

WAGE_i : Average hourly earnings of the i-th person (in $);

EDUC_i : Level of education of the i-th person expressed in number of years of schooling;

EXPR_i : Level of experience of the i-th person expressed in number of years;

FEML_i : A dummy variable taking the value of 1 if the i-th person is a woman

You think that the following theoretical model would be appropriate for your study on discrimination:

WAGE_i = β₀ + β₁*EDUC_i + β₂*EXPR_i + β₃* EXPR_i² + β₄*FEML_i + β₅*(FEML_i*EXPR_i) + ε_i

a. Justify the choice of the variables used here (give a brief interpretation of what we are trying to test with these variables) and state your expectations about the signs of the coefficients. (4 points)

b. Create the necessary variables and estimate the model specified above and report your results including all important statistics. (4 points)

c. Without actually running significance tests, comment on the actual signs and the strength of the estimated coefficients and the validity of the model. (4 points)

d. Take the model that you have estimated in (b) above and write down separately the estimated salary functions for men and women with 12 years of schooling. (4 points)

e. Use the 2 equations found in (d) above to calculate the maximum average hourly earnings (WAGE) for men and women (of a 12-year education level) and the years of experience required by these employees to reach their respective maximum WAGE levels. (5 points)

f. Make a rough graph of the two equations found in (d) above to show the relationship between (WAGE) and (EXPR) for men and women with 12 years of schooling. Make sure to mark the years that it takes to reach the salary plateau (turning point) that you have found in (e) above. (4 points)

g. On the basis of your findings, state briefly your conclusions with respect to the existence of gender discrimination in the market place? (5 points)