This activity refers to the material in chapter 7 of the textbook and to the WAGE1.dta dataset. (introductory econometrics a modern approach)

Dummy Independent Variables: Model Building

1. How can we estimate the wage gap between women and men? For- mulate a regression model where the wage depends on whether the individual is a woman or a man.

2. Does your model control for the fact that, at least in the sample we use, men and women may have on average different characteristics, e.g. different levels of education? Formulate a regression model which identifies the wage gap while also controlling for the impact of education on wages.

3. State the MLR.4 and MLR.5 assumptions for your model.

4. You want to test whether there is a gender wage gap. Use the coeffi- cients in your model to state the relevant hypothesis mathematically and express it in words.

5. Draw the population regression model on a graph.

6. As a side, which model do you think is best, the one that controls for education or the one that does not?