1Lecture 5 Regression with dummy variablesDummy VariablesA dummy variable is a variable that equals either 1 or 0, representing twogroups/categories.Examples: male (= 1 if are male, 0 otherwise), urban (= 1 if in urban area, 0otherwise), etc.Dummy variables are also called binary variables, for obvious reasons.A DummyIndependent VariableA simple model with one dummy (d) independent variable:0Yduαδ=++Ifd= 0, thenY=, and hence ()uE Yαα+=,Ifd= 1, then00(), and hence ()YuE Yαδαδ=++=+.The case ofd= 0 is the base group, andαis the intercept for the base group;0δisthemean differencein the outcome between the represented group (d=1) and thebase group.•Testing the significance of0δtells whether the meanY’sare significantlydifferent between the two groups.Example: In a study of wage differences between male and female workersof similar age and education, the following equation is estimated using OLS:= + + ,WFuαβwhereWis wage in dollars andFis a dummy that equals 1 if a worker isfemale and 0 if male, anduis an error term. In the data, the average wage formaleWf, and for male isWm.(i) How would you interpret the interceptand slope αβ(ii) Based on your interpretation,ˆˆ? and ?αβ==•When there is an intercept in the model, the coefficient of a dummy variablealways represents the mean difference between the dummy representedgroup and the based group.
has intentionally blurred sections.
Sign up to view the full version.