Interpretation of coefficients in LPM

[Anna Jongma]

Dear all,

Perhaps a very basic question, but all the online resources I have looked at so far give me a different answer to the following question.

In a linear probability model, how should the coefficient on a dummy independent variable be interpreted? For instance, say we have the model

Y_i=a+b₁Male+b₂ X_i+u_i

where Y is 1 if the individual participates in the labour market, 0 if not and Male is a dummy that's 1 if the individual is male, 0 if female. Let's say the coefficient b₁ is 0.10. Does this mean that being a man increases the probability to be in the labour force by 10 percent or by 10 percentage points (compared to being a woman)?

I think it should be 10 percentage points, but in many lectures, they speak of 10% .

Kind regards!

[Jackson Monroe]

Percent and percentage points are the same thing. Basis points are 1/100 of a percent, which is what you may be thinking of. In any case, both interpretations are correct, b1=0.1 would be a 10% increase in the probability of being a labor force participant if you are a male.

[Richard Williams]

No, percent and percentage point are not the same. I have been called on this many times! For example, see

http://thewritingbusiness.com/the-di...entage-points/

[William Lisowski]

It is generally a mistake to refer to probabilities as if they were percentages, for exactly the reasons demonstrated here. I would instead say that a coefficient of 0.10 means that being a man increases the probability of being in the labor force by 0.10 compared to being a woman.

[Anna Jongma]

Richard Williams Thank you, this was exactly the difference I had in mind! So am I correct in thinking that the coefficient should be interpreted as the percentage points change in probability of participation if the dummy equals 1?

[Richard Williams]

This handout explains how to interpret the lpm and why the lpm is problematic. https://www3.nd.edu/~rwilliam/xsoc73994/Logit01.pdf

[Anna Jongma]

Richard Williams William Lisowski Thank you both!

[Jeff Wooldridge]

Percentage points is correct. An example I give in my book is when people in the state of Michigan were asked to vote on increasing the sales tax rate from 4 percent to 6 percent. Those in favor referred to it as a two percentage point increase in the tax rate. Those opposed said it was a 50 percent increase in the tax rate. Both were correct.

[David Radwin]

https://www.explainxkcd.com/wiki/index.php/985:_Percentage_Points