This assignment requires you to answer two questions. Question 1 asks you to estimate various versions of Heckman’s Two-Step Estimator for Sample Selection Models (Tobit II). Depending on the dataset assigned to you, you are required to model either union membership and a union hourly wage equation; non-union membership and a non-union hourly wage equation; fulltime work and a hourly wage equation for full time workers, or part time work and a hourly wage equation for full time workers.
Answer ALL QUESTIONS
QUESTION 1
Background
This assignment requires you to use of the appropriate E-views data file from Blackboard. You are assigned to a particular data set according to the fifth digit of your student number:
| If the fifth digit of your student number is: | You must use the dataset: |
| 0, 1 | Heckman Union |
| 2, 3, 4 | Heckman Nonunion |
| 5, 6, 7 | Heckman Fulltime |
| 8, 9 | Heckman Part-time |
Each of the datasets includes the following variables, which were taken from the Labour Force Survey for 2011. All individuals are currently in employment:
age – the age of the respondent in years.
exp01 – the potential labour market experience of the respondent
maritstatus – a categorical variable indicating the marital status of the respondent
1=Married or cohabiting
2=Single
3=Divorced, widowed or separated
school – the number of years of schooling the respondent has.
children16 – the total number of dependent children in the household aged 16 or under.
female – a binary variable takes the value 1 if the respondent is female 0 otherwise.
industry – a categorical variable indicating the industry in which the respondent is employed
1= Agriculture & forestry
2= Electricity & water supply
3= Manufacturing
4= Construction
5= Distribution & hotels
6= Transport & communications
7= Banking & finance
8= Public administration, health & education
9= Others
region_resid – categorical variable indicating the region in which the respondent lives.
1= Northern
2= Yorkshire/Humberside
3= East Midlands
4= East .Anglia
5= London
6= South East
7= South West
8= West Midlands
9= North West
10= Wales
11= Scotland
12= Northern Ireland
hwage – the hourly wage of the respondent.
In addition, and depending on the variable set you have been assigned to, there is an additional binary variable:
For those assigned to Heckman Union – union takes the value 1 if the respondent is a union member and 0 otherwise.
For those assigned to Heckman Nonunion – nonunion takes the value 1 if the respondent is not a union member and 0 otherwise.
For those assigned to Heckman Fulltime – fulltime takes the value 1 if the respondent is a full time employee and 0 otherwise.
For those assigned to Heckman Part-time – partime takes the value 1 if the respondent is a part time employee and 0 otherwise.
Use the dataset to which you have been allocated to estimate the following models:
1. A probit model of selection based on either the binary variable union, non-union, fulltime or partime, which includes a constant, age and its square, the gender dummy, schooling in years, the number of dependent children in the household aged 16 or under, variables indicating the industry of employment (omitting manufacturing), variables indicating marital status (omitting married or cohabiting), and variables indicating the region of residence (omitting Wales). Comment on your results.
2. Use the results from the probit estimates to construct an estimate of the inverse Mills-Ratio and use this variable to estimate a sample selection adjusted a hourly wage equation for either union members (those using Heckman Union), non-union members (those using Heckman Non-Union), fulltime employees (those using Heckman Fulltime), or part time employees (those using Heckman Part-time). The wage equation should have the natural logarithm of hourly earnings as the dependent variable and should include, in the following order, a constant, potential labour market experience and its square, the gender dummy, schooling in years, your estimate of the inverse Mills Ratio, variables indicating the industry of employment (omitting manufacturing), variables indicating marital status (omitting married or cohabiting), and variables indicating the region of residence (omitting Wales). Comment on the results and whether these estimates suggest sample selection is an issue for this data (remember when producing these estimates to restrict the sample to either union=1, nonunion=1, fulltime=1 or partime=1).
3. Irrespective of your findings under (2) re-estimate the above model using both e-views Heckman two-step estimator and maximum likelihood estimation. Keep the order of the variables in the selection equations and the response equation the same as in (1) and (2). Comment on the result (remember to reset the sample for these two estimators).
QUESTION 2
Comment on the differences between the Tobit I and Tobit II( Heckman Selection) models and explain the circumstances in which the two models are identical.
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