Problem 2

How do young people respond to economic conditions? Are they more likely to pursue public service when jobs are scarce? To get at this question, we will analyze data (Ch8 Exercise2 Peace Corps) on state economies and applications to the Peace Corps, as described in table 8.9.

a. Before looking at the data, what relationship do you hypothesize between these two variables? Explain your hypothesis.

b. Run a pooled regression of Peace Corps applicants per capita on the state unemployment rate and year dummies. Describe and critique the results.

c. Plot the relationship between the unemployment and Peace Corps applications with the state of the observation labelled. What sticks out? How may this impact the estimate on unemployment rate in the pooled regression above? Create a scatterplot without the outlier and comment briefly on the difference.

d. Run the pooled model from above without the outlier. Comment briefly on the results.

e. Run a two-way fixed effect model without the outlier using the LSDV approach. Do your results change from the pooled analysis? Which results are preferable?

f. Run a two-way fixed effect model without the outlier using the fixed effects command in Stata or R. Compare to LSDV results.

Dataset