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Econometrics

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Omitted Variable Bias Direction - Hourly Wages

EMETRC-RKQT5F

Suppose hourly wages are a function of years of education and ability:

$$wage = \beta_{0} + \beta_{1} edu + \beta_{2} ability + u$$

Suppose, since you can't adequately measure ability, that you estimate the following instead:

$$\tilde{wage} = \tilde{\beta_{0}} + \tilde{\beta_{1}} edu$$

What is the likely direction of the bias in the estimated parameter $\tilde{\beta_{1}}$?

A

upward (positive bias)

B

downward (negative bias)

C

There is likely no bias.