Mincer regression for Econ lecture

wage-premium.do

clear // Reset the work space
set obs 100000 // Create empty units of observation
set seed 837169 // Fix randomization start point

// Generate ability scores 0-100
gen theta = 100*runiform()

// Fix parameters
local a = 100
local b = 2
local c = 150

// Calculate educated and uneducated wages for everyone
gen w0 = theta
gen w1 = `a' + `b'*theta

// Everyone chooses education optimally
gen edu = (w1 - `c') > w0
    // Assign observed wages based on choices
    gen w = w0 if edu == 0
    replace w = w1 if edu == 1

// Naive estimate of differences
reg w edu

// Calculate true return for all people
gen dif = w1-w0
sum dif // Average true return