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The Interpretation of Multiple Dummy Variable Coefficients: An Application to Industry Effects in Wage Equations

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Author Info

  • Hirschberg, J.
  • Lye, J.

Abstract

The traditional textbook approach to avoiding the dummy trap problem is to delete a category from each qualitative variable. We illustrate an alternative constraint introduced by Sweeney and Ulveling (1972) which can be used to transform conventional dummy variable coefficients. This constraint serves to simplify their interpretation when the regression equation contains several qualitative variables and allows the computation of a coefficient for the deleted class. Using this constraint the intercept term can be written as the mean and the coefficients for the dummy variables are now interpreted as differences from the mean of the dependent variable rather than the deleted class. Computation of a standard error for the estimated coefficient of the deleted class is also discussed. An application to examine the importance of industry wage affiliation in explaining relative wages is presented.

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Bibliographic Info

Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 716.

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Length: 17 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:mlb:wpaper:716

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Postal: Department of Economics, The University of Melbourne, 5th Floor, Economics and Commerce Building, Victoria, 3010, Australia
Phone: +61 3 8344 5289
Fax: +61 3 8344 6899
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Web page: http://www.economics.unimelb.edu.au
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Keywords: ECONOMETRICS ; MATHEMATICAL ANALYSIS;

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Cited by:
  1. Hipólito J. Simón & Raúl Ramos & Esteve Sanromà, 2005. "Collective bargaining and regional wage differences in Spain: An empirical analysis," Working Papers 2005/7, Institut d'Economia de Barcelona (IEB).
  2. Marco Corsino & Roberto Gabriele & Sandro Trento, 2010. "Job flows in Italian SMEs: a longitudinal analysis of growth, size and age," DISA Working Papers 1008, Department of Computer and Management Sciences, University of Trento, Italy, revised 22 Dec 2010.

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