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Unformatted text preview: mated wage equations consists of two parallel lines, where α is the intercept for the base group (M=0), i.e., females, and α + δ 0 is the intercept for the group (M=1), i.e., males. Figure: the estimated wage equation (assuming δ 0 > 0 ) Program evaluation: Often times, economists are interested in evaluating the impact of some public policy, intervention, or program. Can include a dummy indicating, for example, whether or not an individual participates in a job training program, or receives unemployment insurance; or whether or not a kid enrolls in Head Start. After controlling for all the relevant covariates that determine outcome, the coefficient of the dummy gives the impact of interest, i.e., the impact of the job training program, unemployment insurance, or Head Start. 2 Dummies for Multiple Categories • We can use a set of dummy variables to represent variables with multiple categories. Suppose education is reported in three categories in the data: HS dropout, HS grad only, or college grad To compare wage differences between HS grads, college grads and HS dropouts, can include two dummy variables hsgrad and colgrad to represent the three categories, where hsgrad = 1 if HS grad only, and 0 otherwise; and colgrad = 1 if college grad, and 0 otherwise wage = α + δ1hsgrad + δ 2colgrad + β exper + u 1) Expected/mean wage for high school dropouts = α + β exper (when hsgrad=0, colgrad=0, then hsdropout=1). 2) Expected/mean wage for high school grads = α + δ1 + β exper (when hsgrad=1, colgrad=0, then hsdropout=0). 3) Expected/mean wage for college grads = α + δ 2 + β exper (when hsgrad=0, colgrad=1, then hsdropout=0). • • In the above model, hsdropout is the default category. o If there are three categories, one can only include two dummies. Including all three dummies will lead to perfect collinearity (add up to one). For the same work experience, the mean wage difference between hsgrad and hsdropout is δ1 , and that between colgrad and hsdropout is δ 2 . o So δ1 represents the mean wage difference b...
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This document was uploaded on 03/11/2014.

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