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Question

Conduct a simple linear regression analysis to examine the relationship between 'education' (the independent variable) and 'wage' (the dependent variable)?

Solution

Purpose of the Report

This report aims to explore the question of how 'Education' may be affecting 'Wages' that people receive – do people with more years of education earn more than those with a lesser number of years of education or is there no such relationship between the two variables. We use simple regression analysis among other statistical tools to analyze wage and education data for 100 data points and try to arrive at a conclusion in this report. We also try to address how the existence of a relationship between the two variables may affect macroeconomic variables like unemployment and income inequality and what may be some of the recommendations in this regard.

Background

In several studies prior to this, one of the major causes of income inequality has been asserted to be 'disparities in educational attainment'. Higher the education level, higher is the income. This statement has often helped societies to automatically segregate themselves economically even in some of the most advanced economies of the world, for example, the USA where it does not remain constricted to being a mere income effect, but also heavily affects the unemployment rates across groups with different levels of educational attainment. Also, low wages of parents may give rise to the lesser educational attainment of the children which in turn may again lead to low wage. This is a vicious cycle that may have unpleasant impacts on the social fabric. On the other hand, those with higher qualifications may gain easy entry into training programs that can further raise their wages. Thus, the difference in wages can be seen as a premium paid for enhanced skills. However, several studies have also found a weak association or none at all between these two variables. Often, the degree of association differs from country to country due to several local factors.