In studying the movement in the production workers' share in the value added (i.e., labor's share), the following models were considered by Gujarati*:
Model A: Yt = β0 + β1t + ut
Model B: Yt = α0 + α1 t + α2 t2 + ut
where Y = labor's share and t = time. Based on annual data for 1949- 1964, the following results were obtained for the primary metal industry:
Model A:Yˆt = 0.4529 - 0.0041t R2 = 0.5284 d = 0.8252
(-3.9608 )
Model B: Yˆt = 0.4786 - 0.0127t + 0.0005t2
(-3.2724) (2.7777)
R2 = 0.6629 d = 1.82
where the ?gures in the parentheses are t ratios.
a. Is there serial correlation in model A? In model B?
b. What accounts for the serial correlation?
c. How would you distinguish between "pure'' autocorrelation and speci?- cation bias?