Reference no: EM131727018

Qusetion: ‘‘Sheepskin screening'' in recruiting. Economic research has long established evidence of a positive correlation between earnings and educational attainment (Economic Inquiry, January 1984). However, it is unclear whether higher wage rates for better educated workers reflect an individual's added value or merely the employer's use of higher education as a screening device in the recruiting process. One version of this ‘‘sheepskin screening'' hypothesis supported by many economists is that wages will rise faster with extra years of education when the extra years culminate in a certificate (e.g., master's or Ph.D. degree, CPA certificate, or actuarial degree).

(a) Write a first-order, main effects model for mean wage rate E(y) of an employer as a function of employee's years of education and whether or not the employee is certified.

(b) Write a first-order model for E(y) that corresponds to the ‘‘sheepskin screening'' hypothesis.

(c) Write the complete second-order model for E(y) as a function of the two independent variables.