Suppose you want to estimate a wage equation for married women of the form
In(WAGE) = B₁ + B₂HOURS + B₂EDUC+ B.EXPER+e
where WAGE is hourly wage, HOURS is the number of hours worked per week. EDUC is years of education, and EXPER is years of experience. Your classmate observes that higher wages can bring forth increased work effort, and that married women with young children may reduce their hours of work to take care of them, so that there may be an auxiliary relationship such as
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HOURS= a₁ + a2ln(WAGE)+ a KIDS + u
where KIDS is the number of children under the age of six in the woman’s household. (a) Can the wage equation be estimated satisfactorily using the least squares estimator? If not, why not?
(b) Is the wage equation “identified”? What does the term identification mean in this context?
(c) If you seek an alternative to least squares estimation for the wage equation. suggest an estimation procedure and how (step by step, and not a computer command) it is carried out