Question 3 (15 points)
You are interested in whether diversity of employees in a firm increases their productivity. To study this, you collected data of firms. You defined diversity of employees as proportion of workers who are female or within ethnic groups that are less than 2.5% of Australian population. You used average hourly wage rates as a proxy for productivity of workers. Load dataset using following command:
• For Windows users:
dat = read.csv("C:/FinalExamData/12345678Question3Data.csv")
• For Mac Users:
dat = read.csv("~/FinalExamData/12345678Question3Data.csv")
Variables in the dataset are:
• firmid: firm id. Data from the same firm id is from the same firm
• year: year that data is collected. Data are collected from 2001 to 2007 every two years.
• rate: average hourly wage rate of workers in a firm, as a proxy for productivity
• diversity: proportion of workers who are female or within small ethnic groups (less than 2.5% ofAustralian population) in a firm
• education: average years of education of workers in a firm
• experience: average years of experience of workers in a firm
(a) (3 points) Consider the regression:
Suggest a confounding factor that is different across firms but constant over time that makes not a causal effect of diversity on productivity of workers.
(b) (3 points) Suggest a confounding factor that is the same across firms but change over time that makes in (a) not a causal effect of diversity on productivity of workers.
(c) (3 points) Estimate the causal effect of diversity on productivity of workers by running a two-way fixed effect regression of log of rate on diversity, education and experience, with firm and year fixed effects.
(d) (2 points) According to the estimate in (c), what would be the effect of increase in the proportion of workers who are female or within small ethnic groups by 0.1 on average hourly rates of a firm?
(e) (2 points) Is the causal effect in (c) statistically significant at the 5% significance level?
(f) (2 points) Based on (c) and (e), conclude whether whether diversity of employees in a firm increases their productivity.
