This note is to help you with Problem 6 and Computer Exercise C6.

I also intend it to remind you it's important to get the units right when interpreting a regression result. Let's use the model of educations impact on wages.

wage = 0 + 1 educ + u !
If the unit of the education variable is years (a bachelor degree holder usually has 16 years of education) and the unit of wages is dollars per week then the slope parameter has the units $ per week per year of education. I noticed that many of you had trouble with the unit for the parameter and its estimate in the minutes of sleep and total work question. Getting the unit right ensure you can tell the right story about the results of a regression. If you decide to work on the return to education problem for your EC381 or EC481 project you will more often read that the researchers modelled the relationship between wages and education with a function that look like this:

log ! (wage) = 0 + 1 educ +

I changed the names of the parameters to alpha and the disturbance to epsilon, the Greek letter that looks like and e. I just want to indicate that this is a different model. In particular the slope parameter has a different interpreatation. That's because increases in years of education are increasing the log of wages.

1 =
!

log (wage) educ

You may (or may not) have learned this fact about differences in the logarithm of a variable

log (wage)
!

wage wage

This relation says, differences in the log of wages are approximately equal to the proportionate difference in the wages. If we multiply both side by 100, we can say something even more useful:

100log (wage) 100

!

wage wage

This relation say that 100 times the difference of the logs is approximately equal to the percent difference in the wages. Try this out with two hourly wage rates, $10 per hour and $12 per hour. Let's return to

1 =
!

log (wage) educ log (wage) wage 100 educ wageeduc

and add what we now know about the difference of logs.

1001 = 100
!

If we multiply the slope parameter by 100, we can interpret the resutl as the percent increase in wages per year of education. Ther are two other models that employ logarthmic transformations of one or both variables.

log ! (wages) = 0 + 1 log (educ) +

Recall from your discussion of production in EC270 the power function representation of the total product curve:
1 q ! = 0 labour

Here, output, q, is a power function of the labour input. The power parameter, gamma one, is the elasticity of output with repect to the labour input. Take the logarithm of both sides an you get
0 log (q ) = 0 + 1 log (labour) !

where
0 ! 0 = log (0 )

If you added a disturbance term to the model that is linear in the logs and parameters, you get something that looks just like the wage equation with the logs on both sides.
0 log (q ) = 0 + 1 log (labour) + !

You already know that the slope parameter for this model is the elasiticity of output with respect to input, so the slope parameter of the wage model with logs on both sides must be the elasticity of wages with respect to years of education. The last model, which you don't see frequently used in studing the return to education is

wage = 0 + 1 log (educ) + !

I'll leave it to you to figure out why I claim that

1 !100
is the change in wages per one percent increase in years of education. Finally, just so you are clear, suppse your Stata dataset has the variables

lwage = log (wage) !

!leduc = log (educ) in addition to wage and educ. You would estimate the four models above with the Stata commands regress wage educ regress lwage educ regress lwage leduc regress wage leduc NOTE: I have used different parameters and disturbances for each model, as I said above, to indicate each model is different from the others.