Introduction of Empirical Analysis

Empirical analysis combines theory and facts in a particular way. From the viewpoint of theory, it can be considered the application of real-world data to economic theory. Conversely, from the viewpoint of the facts, empirical analysis can be considered a systematic way of studying economic data.

Theory Facts

Model Data Statistical

Theory

Econometric Refined Econometric

Model Data Techniques

Estimation of the Econometric Model with the

Refined Data Using Econometric Techniques

Structural Policy

Analysis Forecasting Evaluation

Figure 1. Econometric Approach

In general, the practice of an empirical analysis can be summarized as the following:

1.  It all starts with a problem—a lack of information or uncertainty regarding an outcome, or a question that involves “what if …”

2.  Economic theory gives us a way of thinking about the problem: What economic variables are involved, and what is the possible direction of the relationship(s)? How would we make use of new information if we had it?

3.  This information is then arranged in terms of a working economic model that lists our underlying assumptions. Hypotheses of interest are specified.

4.  That working economic model leads to the statistical model that describes the process by which the sample observations are viewed as having been generated, the classification of the variables, and the functional form of the relationship.

5.  Sample observations that are consistent with the economic model are generated or, more usually, collected.

6.  Given the statistical model and sample observations, an estimation rule is selected or developed that has good statistical properties.

7.  Estimates of the unknown parameters are obtained with the help of a statistical software package and a computer; appropriate hypothesis tests are performed.

8.  The statistical and economic consequences and the implications of the empirical results are analyzed and evaluated.

9.  If consistency between economic and statistical model and the sample data was not achieved, what are the potential trouble spots, and what are the suggestions for future analysis and evaluation?

Choosing Research Topics

It all starts with a problem. How to address and define the problem is the main issue of choosing a research topic. There are some guidelines:

1.  Four “I”s: Interesting, Important, Insightful, and Intelligent.

2.  What is new and so what: the position of the current study in the literature

3.  Evidences or stylized facts—the usefulness of statistics

4.  Literature and contribution—what has been done and what need to be done

5.  General to specific—general for research background and specific for current focus

Regression Analysis

Labor economics is an empirical science. It makes extensive use of econometrics, the application of statistical techniques to study relationships in economic data. The main statistical technique used by labor economists is regression analysis. The standard model of regression analysis is the following:

Y = a + b X

Y is called the dependent variable. X is called the independent variable. a and b are the regression coefficients, and b reflects the influence of the independent variable (X) on the dependent variable (Y). The estimation of a and b can be conducted through many statistical packages such as SAS, LIMDEP, TSP, and E-View. This simple regression model can be extended to multiple regression models by including more independent variables (regressors).

Writing a Research Report

Economic research reports have a standard format in which the various steps of the research project are discussed and the results are interpreted. The following outline is typical:

1.  Statement of the problem

The place to start your report is with a summary of the questions you have investigated, why they are important and who should be interested in the results. Identify the contents of each section of the report.

2.  Review of the literature

Briefly summarize the relevant literature in the research area you have chosen, so that you may make clear how your work extends our knowledge.

3.  The economic model

Specify the general economic model that you used, define the economic variables. State the model’s assumptions and identify hypotheses you wish to test.

4.  The statistical model

Identify the statistical model that corresponds to the economic model. Make sure you include a discussion of the variables in the model, the functional form, the error assumptions and any other assumptions that you make.

5.  The data

Describe the data you used, the source of the data, and any reservations you have about their appropriateness within the economic and statistical models.

6.  The estimation and inference procedures

Describe the estimation methods you used and why they were chosen. Identify hypothesis testing procedures and their use.

7.  The empirical results and conclusions

Report the parameter estimates, their interpretation, and values of test statistics. Comment on their statistical significance, their relation to previous estimates, and their economic implications.

8.  Possible extensions and limitations of the study

Your research will raise questions about the economic model, data, and estimation techniques. What future research is suggested by your findings, and how might you go about it?

9.  Acknowledgements

It is appropriate to recognize those who have commented on and contributed to your research. This may include your instructor, a librarian who helped you find data, and a fellow student who read and commented on your paper, for example.

10.  References

An alphabetical list of the literature you cite in your study, as well as references to the data sources you used.