ECON 4009 Labor Economics 2017 Fall By Elliott Fan Economics, NTU Elliott Fan: Labor 2017 Fall Lecture 9

Example: Angrist and Krueger 1991 Explores the effect of education on earnings IV: quarter of birth Students are required to enter school in the calendar year in which they turn 6. Compulsory schooling laws require students o remain in school only until their 16th birthday. Thus, students born in different quarters are allowed to leave school by the laws at different grades. Elliott Fan: Labor 2017 Fall Lecture 9

Example: Angrist and Krueger 1991 Key variables: Outcome variable (Y): wage Treatment variable (D): education (years of schooling) Instrumental variable (Z): quarter of births Elliott Fan: Labor 2017 Fall Lecture 9

Example: Angrist and Krueger 1991 Elliott Fan: Labor 2017 Fall Lecture 9

Example: Angrist and Krueger 1991 Elliott Fan: Labor 2017 Fall Lecture 9

Example: Angrist and Krueger 1991 Elliott Fan: Labor 2017 Fall Lecture 9

Example: Angrist and Krueger 1991 The 3 requirements: First stage: graphically obvious but needs to check if 𝜋 11 is zero or not. Independence assumption: Are quarters of birth randomly assigned? Exclusion restriction: Do quarters of birth affect wage only through education? Elliott Fan: Labor 2017 Fall Lecture 9

Example: Angrist and Krueger 1991 Elliott Fan: Labor 2017 Fall Lecture 9

Example: Angrist and Krueger 1991 Who are compliers here? Compliers here are individuals whose decisions on leaving school are determined by minimum age requirement of law. These are not population representative (content specificity) Elliott Fan: Labor 2017 Fall Lecture 9

LATE criticisms and rebuttals Criticisms (Deaton, 2009, and Heckman and Urzua, 2009),: 1. What is the interesting economic question to which the LATE is the answer? 2. What is the actual population included in the LATE? Rebuttals (Imbens 2010): 1. We can estimate LATE. 2. External validity is always hard—not just for LATE. Elliott Fan: Labor 2017 Fall Lecture 9

LATE criticisms and rebuttals Elliott Fan: Labor 2017 Fall Lecture 9

Elliott Fan: Labor 2017 Fall Lecture 9 Summary of LATE debate The strength of a method depends on multiple conditions, including data quality, questions of interest, precision of estimates, and computational costs. Regarding policy evaluation, quality research using various approaches, including IV, is highly demanded in Taiwan. Elliott Fan: Labor 2017 Fall Lecture 9

More things to know before we move on The instrumental variable needs not be a dummy variable We can use multiple instrumental variables in estimation The merit to use multiple IVs is richer variations of IVs It is trickier to define compliers and non-compliers when the IV is not a dummy, or when multiple IVs are employed We can no longer take the ratio to obtain the estimate in the cases of multiple IVs Elliott Fan: Labor 2017 Fall Lecture 9

Elliott Fan: Labor 2017 Fall Lecture 9 IV papers on Taiwan Chou et al. (2010), Parental education and child health They analyze the causal effects of mother’s or father’s schooling on infant birth outcomes. Using the 1968 extension of compulsory education from 6 to 9 years to construct the instruments. Four different health measures for infants. They calculate the intensity of the program across counties/cities measured by the cumulative number of new junior high schools that opened as of 1973 per 1,000 students aged 12-14 in 1968. Elliott Fan: Labor 2017 Fall Lecture 9

Elliott Fan: Labor 2017 Fall Lecture 9 IV papers on Taiwan Chou et al. (2010), Parental education and child health Note that there are two potential Ivs dummy indicating age 6 or younger in 1968 the dummy X intensity They used the 2nd one, why? Elliott Fan: Labor 2017 Fall Lecture 9

Elliott Fan: Labor 2017 Fall Lecture 9 IV papers on Taiwan Chou et al. (2010), Parental education and child health The 3 requirements: First stage: graphically obvious but needs to test on the coefficient. Independence assumption: Is policy (and policy intensity) randomly assigned? Exclusion restriction: Does policy (and policy intensity) affect children health only through parental education? Elliott Fan: Labor 2017 Fall Lecture 9

Elliott Fan: Labor 2017 Fall Lecture 9 IV papers on Taiwan Chou et al. (2010), Parental education and child health Elliott Fan: Labor 2017 Fall Lecture 9

Elliott Fan: Labor 2017 Fall Lecture 9

Elliott Fan: Labor 2017 Fall Lecture 9 IV papers on Taiwan Chou et al. (2010), Parental education and child health The first stage: Elliott Fan: Labor 2017 Fall Lecture 9

Elliott Fan: Labor 2017 Fall Lecture 9 IV papers on Taiwan Chou et al. (2010), Parental education and child health Elliott Fan: Labor 2017 Fall Lecture 9

Elliott Fan: Labor 2017 Fall Lecture 9 IV papers on Taiwan Chou et al. (2010), Parental education and child health Elliott Fan: Labor 2017 Fall Lecture 9

Elliott Fan: Labor 2017 Fall Lecture 9 IV papers on Taiwan Chou et al. (2010), Parental education and child health Elliott Fan: Labor 2017 Fall Lecture 9

Elliott Fan: Labor 2017 Fall Lecture 9 IV papers on Taiwan Chou et al. (2010), Parental education and child health Alternative first stage: Elliott Fan: Labor 2017 Fall Lecture 9

Elliott Fan: Labor 2017 Fall Lecture 9 IV papers on Taiwan Chou et al. (2010), Parental education and child health In each of the four infant health outcome equations, the logit coefficient of mother’s program intensity is negative and significant at the 5 percent level (see Table 5, panel A). All three mortality coefficients are significant at the 1 percent level. All four mother’s schooling coefficients are significant at the 1 percent level in the structural infant health equations estimated by weighted least squares (WLS, see panel B). The estimates in Table 5, panel B treat mother’s schooling as exogenous and ignore the possibility that it is correlated with the disturbance term in the equation. Perhaps the most interesting set of results in the table pertains to the structural infant health equations estimated by weighted two-stage least squares (WTSLS, see panel C). These estimates treat schooling as endogenous and employ the interaction between treatment status and program intensity as an instrument. Although the schooling coefficients have much larger standard errors in the WTSLS regressions, all are negative and all are significant at the 10 percent level. Only the neonatal mortality coefficient loses its significance at the 5 percent level. Moreover, the WTSLS and WLS coefficients are similar in magnitude. Elliott Fan: Labor 2017 Fall Lecture 9

Elliott Fan: Labor 2017 Fall Lecture 9 IV papers on Taiwan Chou et al. (2010), Parental education and child health Elliott Fan: Labor 2017 Fall Lecture 9