Binary Variables In Regression

Dummy variables are usually used in regression equations that also contain other quantitative variables. In the earnings equation in Example 4.3, we included a variable Kids to indicate whether there were children in the household under the assumption that for many married women, this fact is a significant consideration in labor supply behavior. The results shown in Example 7.1 appear to be consistent with this hypothesis.

Example 7.1 Dummy Variable in an Earnings Equation

Table 7.1 following reproduces the estimated earnings equation in Example 4.3. The variable Kids is a dummy variable, which equals one if there are children under 18 in the household and zero otherwise. Since this is a semilog equation, the value of -.35 for the coefficient is an extremely large effect, that suggests that all other things equal, the earnings of women with children are nearly a third less than those without. This is a large difference, but one that would certainly merit closer scrutiny. Whether this effect results from different labor market effects which affect wages and not hours, or the reverse, remains to be seen. Second, having chosen a nonrandomly selected sample of those with only positive earnings to begin with, it is unclear whether the sampling mechanism has, itself, induced a bias in this coefficient.

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