Consider a regression study involving wages in as the y var

Consider a regression study involving wages in $ as the y variable and the x variables are years of experience, and years of education. Suppose you have the following data

Person Years of experience    Years of education

1              4                                     11

2               2                                      20

3              10                                     12

4               13                                      14

5               25                                      16

If you create variable called low_experience which equals 1 if the person has less than 5 years of experience, and 0 otherwise, which person would be coded as1 and which as 0 [2]

If you create variable called medium_experience which equals 1 if the person has between 5 and 15 years of experience, and 0 otherwise, which person would be coded as1 and which as 0 [2]

If you create variable called high_experience which equals 1 if the person has more than 15 years of experience, and 0 otherwise, which person would be coded as1 and which as 0 [2]

Suppose you estimate the following regression

Y= 5.5 + 10Years of Education + 10Medium_Experience + 19High_Experience

Interpret the coefficient on years of education [3]

Why can you not include 3 dummy variables in the above regression [4]

Interpret the constant [3]

Interpret the coefficient on Medium_Experience [3]

Interpret the coefficient on High_Experience [3]

Solution

A)

Person Years of experience    Years of education LOW EXP

1              4                                     11 1

2               2                                      20 1

3              10                                     12 0

4               13                                      14 0

5               25                                      16 0

B)

Person Years of experience    Years of education MED EXP

1              4                                     11 0

2               2                                      20 0

3              10                                     12 1

4               13                                      14 1

5               25                                      16 1

C)

Person Years of experience    Years of education HIGH EXP   

1              4                                     11 0

2               2                                      20 0

3              10                                     12 0

4               13                                      14 0

5               25                                      16 1

D)

Y= 5.5 + 10Years of Education + 10Medium_Experience + 19High_Experience

HERE COEFFICIENT OF EDUCATION IS 10 WHICH MEANS THAT EVERY NUMBER OF EDUCATION WILL BE MULTIPLIED BY A NUMBER 10 TO GIVE IT A GENERAL VALUE AMONG ALL THE DIFFERENT 5 PERSON, BY THIS WE WILL GET A GENERALISATION TREND TOWARDS THE EDUCATION.