SOUTHERN CROSS UNIVERSITY

ASSIGNMENT COVER SHEET

Economics and Quantitative Analysis

Student Name: Pramod Shah

Student ID No.: 22843119
Unit Name: Economics and Quantitative Analysis
Unit Code: ECO82001
Tutor’s name: Dr. Badri Prasad Bhattarai
Assignment No.: Assessment 1
Assignment Title: Linear Regression Assessment
Due date: 29/01/2018
Date submitted: 28/01/2018

Declaration:

I have read and understand the Rules Relating to Awards (Rule 3 Section 18 – Academic
Misconduct Including Plagiarism) as contained in the SCU Policy Library. I understand
the penalties that apply for plagiarism and agree to be bound by these rules. The work I am
submitting electronically is entirely my own work.
Signed: Pramod Shah

Date: 28th January 2018

 Economics and Quantitative Analysis
Linear Regression Report

Purpose
This report generates an equation (simple linear regression) to describe and examine the statistical
relation between two variables wages and education based on the given 100 observations. The
purpose of the report is to find out the strength of the effect that the education (independent
variable) have on wages (dependent variable). This will help us to understand that how much
earning per hour will change with one or more year change in education.

Background
Education has many benefits and positive impact in our life and opens door to many opportunities.
Education and earnings has positive relationship, as higher the level of education higher the income
(wages). As we can see job related vacancies announcement, higher place need higher level of
education and higher position accounts for higher salary payment. Not all, but in most of the cases
people with higher education are paid more. Each year many students begin their journey to higher
education in the hope to get high paying job in the future. Due to globalization and technological
advancement, many manufacturing jobs are wiped out and people with school level education only
able to support middle class lifestyle. So, there is simple equation more education results more
earning.

Method
I have taken 100 observation depicting per hour wages rate and year of education. Observation
shows the different earning per hour at various number of year of education. Linear regression
method is used to check the relation between wage and education which will show that one year
change in education results how much change in per hour changes in wages. In addition,
descriptive analysis also done find out average number of year of education and average per hour
wage. Minimum year of education is 6 and maximum is 21 where minimum wages is 4.33
and maximum 76.39. Scatter diagram is used to find out the correlation between the variables.

Descriptive analysis
Descriptive analysis summarized the data more meaningful way, which allows the easy
interpretation of data.
Education Summary Wages Summary
Mean 13.76 Mean 22.31
Standard Error 0.27 Standard Error 1.40
Median 13.00 Median 19.39
Mode 12.00 Mode 38.45
Standard Deviation 2.73 Standard Deviation 14.02
 Sample Variance 7.44 Sample Variance 196.60
Kurtosis 1.32 Kurtosis 2.61
Skewness 0.44 Skewness 1.49
Range 15.00 Range 72.06
Minimum 6.00 Minimum 4.33
Maximum 21.00 Maximum 76.39
Sum 1376.00 Sum 2230.81
Count 100.00 Count 100.00

Average year of education is 12 years and wages is 22.31. Most people had undertaken 12 years
of education and whereas most people earn 38.45 dollar per hour. Dispersion is relatively high in
distribution of wages compared to education as standard error is 1.40 and 0.27 of wages and
education respectively. Observation data of education are more symmetrical then wages, as both
skewness and kurtosis has positive value so both are right skewed and wages is heavy tailed then
education.

Scatter Diagram
This scatter diagram show the positive correlation between education and wages. The regression
line passes through the scatter point showing positive relation with linear equation, Y=2.1238X -
6.9148. The negative Y-intercept represents the regression line passes below the origin of Y-axis.

Scatter Diagram: Relation between wages and education

90
80 y = 2.1238x - 6.9148
70
60
Wages

50
40
30
20
10
0
0 5 10 15 20 25
Education
Linear Regression Analysis
Regression Statistics
Multiple R 0.4131
R Square 0.1706
Adjusted R Square 0.1621
Standard Error 12.8344
Observations 100

Coefficients Standard Error t Stat P-value Lower 95% Upper 95.0%

Intercept -6.9148 6.6339 -1.0423 0.2998 -20.0795 6.2500
Education 2.1238 0.4730 4.4899 0.0000 1.1851 3.0624

Regression equation: Y = a + bX
Estimated regression equation is Y= -6.9148 + 2.1238 X
Where,
Y represents wages (dependent variable)
X represents education (independent Variable)
Slope coefficient (b) = 2.1238
Y-intercept (a) = -6.9148

Slope coefficient illustrates the rise and run on regression line of two given variables wages and
education and their correlation. As the calculated slope coefficient is positive (b=2.1238) shows
the positive correlation between wages and education. One year increase in year of education
results 2.1238 increase in per hour wages.
Statically we can say that, earning per hour is directly associated with number of year of education
and they are positively correlated. As year of education increases, earning per hour is also
increases. Rise in wages help to live the standard lifestyle, so to increase people life standard one
should first invest on education.

The relation between two variables how they fit the derived linear regression equation. The
dependent variable wages shows the positive correlation with education which can be proved by
the positive slope coefficient. R squared shows the about 17% variation in the impact of year of
education on wages. The coefficient of correlation Multiple R about 0.41 and standard error about
13% provides the moderate fit of regression equation.

Predicted wages of person with 12 and 14 years of education:

X (Education in Year) Y (Wages $ per hour)
12 18.5708
14 22.8178
Difference in hourly wages rate 4.2475
From here we can clearly find out that with 2 years increase in education from 12 year to 14 year,
increased the wages by $ 4.2475 per hour.
Discussion
After careful consideration of findings, this report demonstrates that year of education and per
hour earning are positively correlated. One unit change in education has about two unit change in
wages. The calculated p-value 0.29 which is greater than 0.05, which give acceptance to the
analysis that the increase in education results increase in wages. The key strength of this analysis
is that it defines the strength and direction of relation between the variables and also helps us
to determine the wages at any given year of education, which can be used for forecasting. The
limitation of this analysis is that it limited to linear relationship. It assumes that there is straight
line relation between variables. For instance relationship between age and income is curved;
income increases early part of adulthood, flattened out in latter adulthood and start declines in
retirement, which graphical representation will be curved. In addition, the calculated Y-intercept
is negative which means that zero year of education accounts for -6.9148 wages, which is not
possible because wages cannot be negative. It is high sensitive to outliers (surprising data) and
always assumes data should be independent, which in not possible in real life. This analysis holds
the linear relationship that is straight line, which cannot use to define all types of variable, as I
mentioned earlier relation between age and income, which can be best defined by non-linear
regression analysis (non-linear curve fitting) so always the findings from this analysis is not
consistent. Correlation of coefficient measure the exact strength of relation between variables
which is more consistent. In this case, despite of some limitation, findings have clear policy
implication.

Recommendation
From the analysis, I suggest following recommendation:
1. The relationship between education and wage is positive and p-value greater than 0.05 tells
us that increase in number year of education increases the earning per hour. Increased
earnings per hour lead to high standard life style. So investment in education means
investment on lifestyle.
2. Multiple R, R squared, standard error approx. 0.4, 17% and 13% respectively shows that
data do not fit the regression line so good. The result from this analysis cannot be
considered consistent. For this, use of non-linear regression analysis would be better.
3. To earn average level of earning, one should undertake the 13 year of education. From the
observation we observed that most people took 12 years of education which close to
average number.