1. ECON 3039 Labor Economics 2015-16 By Elliott Fan Economics, NTU Elliott Fan: Labor 2015 Fall Lecture 91

2. Example: Angrist and Krueger 1991 Elliott Fan: Labor 2015 Fall Lecture 92 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 16 th birthday. Thus, students born in different quarters are allowed to leave school by the laws at different grades.

3. Example: Angrist and Krueger 1991 Elliott Fan: Labor 2015 Fall Lecture 93 Key variables: Outcome variable (Y): wage Treatment variable (D): education (years of schooling) Instrumental variable (Z): quarter of births

4. Example: Angrist and Krueger 1991 Elliott Fan: Labor 2015 Fall Lecture 94

5. Example: Angrist and Krueger 1991 Elliott Fan: Labor 2015 Fall Lecture 95

6. Example: Angrist and Krueger 1991 Elliott Fan: Labor 2015 Fall Lecture 96

7. Example: Angrist and Krueger 1991 Elliott Fan: Labor 2015 Fall Lecture 97

8. Example: Angrist and Krueger 1991 Elliott Fan: Labor 2015 Fall Lecture 98

9. Example: Angrist and Krueger 1991 Elliott Fan: Labor 2015 Fall Lecture 99 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)

10. 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 2015 Fall Lecture 910

11. LATE criticisms and rebuttals Elliott Fan: Labor 2015 Fall Lecture 911

12. 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 2015 Fall Lecture 912

13. 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 2015 Fall Lecture 813

14. 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 2015 Fall Lecture 914

15. 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 2 nd one, why? Elliott Fan: Labor 2015 Fall Lecture 915

16. IV papers on Taiwan Chou et al. (2010), Parental education and child health Elliott Fan: Labor 2015 Fall Lecture 916 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?

17. IV papers on Taiwan Chou et al. (2010), Parental education and child health Elliott Fan: Labor 2015 Fall Lecture 917

18. Elliott Fan: Labor 2015 Fall Lecture 918

19. IV papers on Taiwan Chou et al. (2010), Parental education and child health The first stage: Elliott Fan: Labor 2015 Fall Lecture 919

20. IV papers on Taiwan Chou et al. (2010), Parental education and child health Elliott Fan: Labor 2015 Fall Lecture 920

21. IV papers on Taiwan Chou et al. (2010), Parental education and child health Elliott Fan: Labor 2015 Fall Lecture 921

22. IV papers on Taiwan Chou et al. (2010), Parental education and child health Elliott Fan: Labor 2015 Fall Lecture 922

23. IV papers on Taiwan Chou et al. (2010), Parental education and child health Alternative first stage: Elliott Fan: Labor 2015 Fall Lecture 923

24. IV papers on Taiwan Chou et al. (2010), Parental education and child health Elliott Fan: Labor 2015 Fall Lecture 924

25. IV papers on Taiwan Chou et al. (2010), Parental education and child health Elliott Fan: Labor 2015 Fall Lecture 925