Home » Suppose you want to estimate the following labor supply equation: Annual Work Hours = + *(Average Hourly Wage) + You gather data on US workers aged…

# Suppose you want to estimate the following labor supply equation: Annual Work Hours = + *(Average Hourly Wage) + You gather data on US workers aged…

Suppose you want to estimate the following labor supply equation: Annual Work Hours = α + β*(Average Hourly Wage) + ε You gather data on US workers aged 22 to 55 from the Current Population Survey. You define the Average Hourly Wage as self-reported total annual labor income divided by self-reported total annual work hours.

a. Describe in words how to interpret the coefficient β (ignore any concerns about causality for now)

b. Give two separate reasons why you might be concerned that β is not a good estimate of the causal effect of a change in the hourly wage a worker faces on the number of hours that they work

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