Nikki Davis The effects of choosing consumption today versus c.docx
Econometrics Final Project
1. Hansen 1
Walker Hansen
Econ 4848-001
Professor McKinnish
December 11, 2015
Econometrics Final Project
Introduction:
The basis of this project was for me to gain information on the added salary bonus
of going to graduate school. I am an economics major in my fourth year and am starting
to feel the pressure of figuring out what I am doing after I graduate. I’ve considered med
school and other graduate programs, as well as going straight into the work force. So with
all of that in mind I came up with this question to test: In the U.S. how does an advanced
degree compared to a bachelors effect income wage for men who have a degree in
economics. This question also piggybacks on the idea that I feel like everyone has heard
saying that an advanced degree will increase wages considerably over the course of a
career.
Data Description:
The data used was collected from ipums.org using the data from 2010. There are 1,961
observations in the data set. The sample observations are all white males that have a
degree in the field of economics. I decided to do white males for two reasons. One, I am a
white male and I wanted to see information that is more related to me personally, and
two, there were very few males with economic degrees that were not white. The age
group of the sample is 18 to 54 and all of the sample observations are employed.
2. Hansen 2
Variables: Variable description:
incwage ----------- Yearly wage and salary income
adv ----------- 0/1 variable, =1 if advanced degree was obtained
age ----------- Age of worker
married ----------- 0/1 variable, =1 if married with spouse present
nchild ----------- Number of own children in the household
uhrswork ----------- Usual hours of work per week
agegroup ----------- categorical variable for age, =1 ages 18-29, =2 ages
30-39, =3 ages 40-49, 4= ages 50-54
adv_age ----------- Interaction term between adv and age
age2 ----------- Age squared
adv_age2 ----------- Interaction term between adv and age2
Table 1:
Mean wage and salary by age group and advanced degree or Bachelor’s Degree:
Age Range Bachelor’s Degree Mean
Salary
Advanced Degree Mean
Salary
18-29 years old 59524.6 69108.6
30-39 years old 121504.5 153035.1
40-49 years old 146917.2 184657.4
50-54 years old 128091.3 169173.3
Total 116368.3 164624.3
3. Hansen 3
From Table 1, before running any regressions, we see that on average people with an
advanced degree earn about 48,256 (164624.3-116368.3) more dollars a year than econ
majors with just a bachelor’s degree. When comparing across age range we can see that
an advanced degree does not have as much of an effect on mean salary before their 30s.
However when they are in their 30s there is about a 30,000 dollar difference, and then in
their 40s and 50s the average difference is about 40,000 dollars.
Graph showing difference in spread of wage and salary from bachelor’s degree (0) and
advanced degree (1):
4. Hansen 4
Regressions and Findings:
Regression1:
Regress incwage on adv
incwage = 116368.3 + 48256.03(adv)
a interpretation: On average for male college graduates with a bachelor’s in economics,
their mean salary will be 116,368.3 dollars per year.
B interpretation: On average, men who went to college and graduated with a bachelors in
economics and then got an advanced degree, make 48,256 more dollars per year than men
with a bachelor’s degree in economics who did not get a advanced degree.
Regression2:
Regress incwage on adv and age
incwage = -2244.5 + 35955.8(adv) + 3096.3(age)
Badv interpretation: On average, men who went to college and graduated with a
bachelor’s in economics and then got an advanced degree, make 35,955 more dollars per
year than men with a bachelor’s degree in economics who did not get an advanced
degree.
Bage interpretation: On average for both men with advanced degrees and men with just a
bachelor’s in economics, every year of work has a 3,096.3 dollar increase in income
wage
5. Hansen 5
Regression3:
Regress incwage on adv, age, and adv_age
incwage = -1618.2 + 33896.1(adv) + 3080.0(age) + 50.3(adv)(age)
Badv interpretation: On average, men who went to college and graduated with a
bachelor’s in economics and then got an advanced degree, start out making 33896.1 more
dollars per year than men with a bachelor’s degree in economics who did not get a
advanced degree.
Bage interpretation: On average for men with a bachelor’s in economics but no advanced
degree, every extra year has a 3080.0 dollar increase in income wage
Badv_age interpretation: On average, men who went to college and graduated with a
bachelors in economics and then got an advanced degree have a 50.3 greater increase in
incwage per year than men with a bachelor’s degree in economics who did not get a
advanced degree.
Regression4:
Regress incwage on adv, age, and adv_age and control for married, nchild, and
uhrswork
incwage = -129397.2 + 11124.7(adv) + 1664.5(age) + 351.1(adv)(age) +
13274.7(married) + 18822.3(nchild) + 3312.7(uhrswork)
Badv interpretation: On average, when controlling for marital status, number of children,
and usual hours of work per week, men who went to college and graduated with a
bachelors in economics and then got an advanced degree, start out making 11124.7 more
6. Hansen 6
dollars per year than men with a bachelor’s degree in economics who did not get a
advanced degree.
Bage interpretation: On average, when controlling for marital status, number of children,
and usual hours of work per week, men with a bachelor’s in economics, every extra year
has a 1664.5 dollar increase in income wage
Badv_age interpretation: On average, when controlling for marital status, number of
children, and usual hours of work per week, men who went to college and graduated with
a bachelors in economics and then got an advanced degree have a 351.1 greater increase
in income wage per year than men with a bachelor’s degree in economics who did not get
a advanced degree.
Table 2: Regression of Income wage on adv, age, and adv_age
No Controls Using controls for marital
status, number of children
and Usual hours of work
Adv 33896.1 (29014.0) 11124.7 (27194.3)
Age 3080.0 (395.3)* 1664.5 (401.5)*
Adv*Age 50.25 (693.1) 351.1 (648.5)
Married 13274.7 (7443.7)
Nchild 18822.3 (2771.0)*
Uhrswork 3312.7 (234)*
* p-value<0.05, (Standard Errors in Parentheses)
Regression5:
Regress incwage on adv, age, and age2
Incwage = -397082.2 + 31277.5(adv) + 24789.5(age) - 280.2(age2)
7. Hansen 7
Badv interpretation: On average, men who went to college and graduated with a
bachelor’s in economics and then got an advanced degree, start out making 31,277.5
more dollars per year than men with a bachelor’s degree in economics who did not get a
advanced degree.
Bage and Bage2 interpretation: On average for both men with advanced degrees and men
with just a bachelor’s in economics, every extra year of work has a 24,740-560(age)
increase in income.
Regression6:
Regress incwage on adv, age, and age2 and control for married, nchild,
and uhrswork
Incwage = -327977.4 + 23973.6(adv) + 12682.9(age) - 138.3(age2) +
9078.6(married) + 16604.4(nchild) + 3239.7(uhrswork)
Badv interpretation: On average, when controlling for marital status, number of children,
and usual hours of work per week, men who went to college and graduated with a
bachelors in economics and then got an advanced degree, start out making 23,973.6 more
dollars per year than men with a bachelor’s degree in economics who did not get a
advanced degree.
Bage interpretation: On average, when controlling for marital status, number of children,
and usual hours of work per week, both men with advanced degrees and men with just a
bachelor’s in economics, every year of work has a 12,682.9 dollar increase in income
wage. However this is just the starting point because salary increases at a diminishing
rate.
8. Hansen 8
Bage2 interpretation: On average, when controlling for marital status, number of
children, and usual hours of work per week, every year of the lives of both men with
advanced degrees and men with just a bachelor’s in economics earnings increase but at a
diminishing rate of 138.3 per year.
Table 3: Regression of Income wage on adv, age, and age2
No Controls Using controls for marital
status, number of children
and Usual hours of work
Adv 31277.5 (5852.6)* 23973.6 (5542.2)*
Age 24789.5 (2875.2)* 12682.9 (2955.6)*
Age2 -280.2 (36.9)* -138.3 (37.3)*
Married 9078.6 (7464.6)
Nchild 16604.4 (2826.6)*
Uhrswork 3239.7 (234.9)*
* p-value<0.05, (Standard Errors in Parentheses)
Regression7:
Regress incwage on adv, age, adv_age, age2, and adv_age2
Incwage = -373157.6 - 234723.9(adv) + 24107.7(age) +
11638.0(adv)(age) - 278.8(age2) + -121.1(adv)(age2)
9. Hansen 9
Badv interpretation: On average, men who went to college and graduated with a
bachelor’s in economics and then got an advanced degree, start out making 234,723.9
less dollars per year than men with a bachelor’s degree in economics who did not get a
advanced degree.
Bage and Bage2 interpretations: On average, every year, men with a bachelor’s degree in
economics increase their salary by 24,107.7 dollars per year, however this amount
diminishes approximately 278.8 dollars every year.
Badv_age and Badv_age2 interpretation: On average, men with an advanced degree have
a 11,638 greater increase in salary per year than men with just a bachelor’s degree in
economics. This too however has a diminishing rate that is 121.1 more than the
diminishing rate of salary per year of men who have a bachelor’s degree in economics.
Peak Salary for advanced degree and bachelor’s degree: On average, men with a
bachelor’s degree in economics will have a peak salary at -24107.7/(2*- 278.8)=43.2
years old. For men with an advanced degree, on average the peak salary is
-(24107.7+11638.0)/(2*(- 278.8-121.1)) or 44.7 years old.
Graph of this equation: Key: Blue Line = Advanced Degree
Red Line = Bachelor’s Degree Only
10. Hansen 10
Bias:
Age Adv Incwage
(+) (+)
There is a positive bias meaning that older white males tend to have an advanced degree
more often, and white males with an advanced degree tend to have a higher income wage.
Since the bias is in a positive direction, the estimate may be higher than the truth.
Omitted Variable Bias:
Adv Personal Drive and Intelligence Incwage
(+) (+)
There is a positive bias meaning that the estimate may be overstating the actual impact on
the truth. I chose this omitted variable because I would imagine that the most driven and
intellectual economic majors are probably going to grad school to learn more. These
11. Hansen 11
people are also probably the most sought after employees, meaning they will tend to have
higher salaries.
Conclusion:
Based on all regressions run it does seem like there is a very big advantage of
white males who have a bachelor’s degree getting some sort of advanced degree. To
compare numbers I decided to plug in and check the difference in income wage for 30
year olds. This difference isn’t yet at the peak income wage earning levels however still
shows great estimates as to the benefit of having an advanced degree. Regression 1 had a
difference of $48,256 dollars. Regression 2 had a difference of $35,956 dollars.
Regression 3 had a difference of $35,405 dollars. Regression 4 had a difference of
$21,658 dollars. Regression 5 had a difference of $31,278 dollars. Regression 6 had a
difference of $23,974 dollars. Regression 7 had a difference of $5,516 dollars. With
taking all of these advantages into account it seems that an advanced degree does really
benefit an economics bachelor’s degree. At just 30 you will be making a large difference
in your salary based on these estimates. At age 40 or 45, the projected area peak earnings
from my age squared model, the projected difference is much greater. From regression 7
the difference is nearly 50,000 dollars at age 45. Adding up all of these differences over
the course of a career and these numbers could reach nearly a million dollar difference in
earnings depending on career length and some other factors.
In regards to improving my research project I think that I could control for some
variables that I decided to get rid of when collecting my data. For example, race and sex
12. Hansen 12
could be interesting to see since in general white males have statistically the highest wage
income in the United States.
This project would be very interesting to extend into looking at specific advanced
degree programs and see which is the most monetarily beneficial. This is something that
could be interesting because instead of clumping together programs that maybe have a
wide range I could find that one graduate program has no real significant monetary
benefit after the bachelor’s degree in economics while another may cause huge increases
in income wage.