Empirical work shows a relatively large and statistically significant effect of a worker’s height on his or her earnings. One explanation for this result is omitted variable bias: Height is correlated with an omitted factor that affects earnings. For example, some authors suggest that cognitive ability (or intelligence) is the omitted factor. The mechanism is straightforward: Poor nutrition and other harmful environmental factors in utero and in early childhood have, on average, deleterious effects on both cognitive and physical development. Cognitive ability affects earnings later in life and thus is an omitted variable in regressions.

a. Suppose this mechanism is correct. Explain how this leads to omitted variable bias in the OLS regression of Earnings on Height. Does the bias lead the estimated slope to be too large or too small?