Econometrics

Essid H.
11/21/2020

Chapter 4 : Transformations and dummy

variables
Example : A wage-discrimination model
Our dataset includes wage as dependent variable, education and dummy variables for gender and race as
independent variables. Let us consider the model in the above equation:

wages = β 1 + β 2 educ + γ 1 black + γ 2 f emale + γ 3 (black ∗ f emale) + u (4.1)

1. Is there a difference between wages of male and female workers with similar experience ?
2. What are the expected wages for different categories ?
White/male.
Black/male.
White/female.
Black/female.
3. Given the same education, calculate the difference between black female and white male.

library(PoEdata)
library(knitr)
library(xtable)

## Warning: package 'xtable' was built under R version 4.0.3

library(printr)

## Warning: package 'printr' was built under R version 4.0.3

## Registered S3 method overwritten by 'printr':

## method from
## knit_print.data.frame rmarkdown

library(effects)

## Warning: package 'effects' was built under R version 4.0.3

## Loading required package: carData

## lattice theme set by effectsTheme()

## See ?effectsTheme for details.
library(car)

## Registered S3 methods overwritten by 'car':

## method from
## influence.merMod lme4
## cooks.distance.influence.merMod lme4
## dfbeta.influence.merMod lme4
## dfbetas.influence.merMod lme4

library(AER)

## Warning: package 'AER' was built under R version 4.0.3

## Loading required package: lmtest

## Loading required package: zoo

##
## Attaching package: 'zoo'

## The following objects are masked from 'package:base':

##
## as.Date, as.Date.numeric

## Loading required package: sandwich

## Warning: package 'sandwich' was built under R version 4.0.3

## Loading required package: survival

library(broom)

## Warning: package 'broom' was built under R version 4.0.3

data("cps4_small", package="PoEdata")
#cps4_small
names(cps4_small)

## [1] "wage" "educ" "exper" "hrswk" "married" "female" "metro"

## [8] "midwest" "south" "west" "black" "asian"

mod5 <- lm(wage~educ+black*female, data=cps4_small)

 beta1 <- coef(mod5)[["(Intercept)"]]
beta2 <- coef(mod5)[["educ"]]
gamma1 <- coef(mod5)[["black"]]
gamma2 <- coef(mod5)[["female"]]
gamma3 <- coef(mod5)[["black:female"]]

kable(tidy(mod5), caption="A wage-discrimination model")

A wage-discrimination model

term estimate std.error statistic p.value

(Intercept) -5.281159 1.9004677 -2.778873 0.0055575

educ 2.070391 0.1348781 15.350089 0.0000000

black -4.169077 1.7747139 -2.349155 0.0190109

female -4.784607 0.7734139 -6.186348 0.0000000

black:female 3.844294 2.3276528 1.651575 0.0989367

educ=16 # example fro educ=16

pred1=beta1+beta2*educ # white/male
pred2=beta1+beta2*educ+gamma1 # black/male
pred3=beta1+beta2*educ+gamma2 # white/female
pred4=beta1+beta2*educ+gamma1+gamma2+gamma3 # black/female
blfm=gamma1+gamma2+gamma3 #difference between black/female and white/male
pred1

## [1] 27.84509

pred2

## [1] 23.67601

pred3

## [1] 23.06048

pred4

## [1] 22.7357

blfm

## [1] -5.10939
1. The results show a significant difference in wages between male and female workers (p-value less than
5%). We say that female workers earns less than female by 4.78 on average.

2. the expected wages for different categories

white/male: β 1 + β 2 educ (the baseline category)

black/male: β 1 + β 2 educ + γ1
white/female: β 1 + β 2 educ + γ2
black/female: β 1 + β 2 educ + γ1 + γ2 + γ3

3. Given the same education, the difference between black female and white male is
γ 1 + γ 2 + γ 3 = −5.11 , which means that the average black female is paid less by $5.11 than the

average white man.