Assignment Task
\Task
This question is based on a paper by Mian and Sufi (2014) which studies the effect of shocks to housing net worth on employment during the global financial crisis of 2007-2009. The intuition is that a decrease in the value of housing reduces demand either because of a wealth effect or because of tighter borrowing constraints. The reduction in demand, in turn, leads to a reduction in employment. The dataset employmentNT.dta contains data on the log change in employment in the nontradable sector between 2007 and 2009, the percentage change in housing net worth, the inverse elasticity of housing supply, the log change in employment in the construction sector and the share of employment in the construction sector in 2006 for 2,800 counties in the United States. Observations are uniquely identified by the variables countyname andstatename.
NOTE: For all regressions in this question, use the total number of households in the county as weights (analytic weights in STATA).
a) To examine the link between the percentage change in housing net worth in county (denoted byvariable CHNW in the dataset) and the log change in employment in the non-tradable sector variable Cemp_0709_NT in the dataset), youestimate the following model:
1. Estimate the model using standard errors clustered by state. Interpret the results. Explain why you would want to use standard errors clustered by state.
2. Do these results have a causal interpretation? Explain in detail. (4 marks)
b) Now consider the same model modified to control for the log change in employment in the construction sector
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