The determining function that drives share of accepted job offers for a company is given by the following equation: AcceptedOffers_t = α₀ + α₁StartingSalary_t + α₂EconomicClimate_t + U_t, where the unit of observation is particular month (t). Suppose one wanted to use the national unemployment rate (unemployment_t) as a proxy for EconomicClimate. Which of the following describes a condition required to hold for this to be an adequate proxy variable? A) α₂ 0 D) EconomicClimate is correlated with StartingSalary

Question

The determining function that drives share of accepted job offers for a company is given by the following equation: AcceptedOffers_t = α₀ + α₁StartingSalary_t + α₂EconomicClimate_t + U_t, where the unit of observation is particular month (t). Suppose one wanted to use the national unemployment rate (unemployment_t) as a proxy for EconomicClimate. Which of the following describes a condition required to hold for this to be an adequate proxy variable? A) α₂ < 0 B) StartingSalary, EconomicClimate, and Unemployment rate to be uncorrelated with "other factors" (U_t) C) α₂ > 0 D) EconomicClimate is correlated with StartingSalary

Quizplus · Accepted Answer

For unemployment to be an adequate proxy variable for EconomicClimate, it must be uncorrelated with other factors (U_t) and assume that there is no omitted variable bias. The other options are unrelated to the adequacy of the proxy variable.

The Determining Function That Drives Share of Accepted Job Offers