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Wage Decompositions with Selectivity-Corrected Wage Equations: A Methodological Note

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Shoshana Neuman ()
Ronald Oaxaca ()

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Abstract

This paper examines the implications of the standard Heckman (Heckit) correction for selectivity bias in wage and earnings functions that are subsequently used in wage decompositions. Even when justified, Heckit selectivity correction introduces some fundamental ambiguities in the context of wage decompositions. The ambiguities arise from group differences in the selection term which consists of a parameter multiplied by the Inverse Mills Ratio (IMR). The parameter is identified as the product of the standard deviation of the errors in the wage equation and the correlation between the wage equation error and the selection equation error. How should group differences in these parameters be interpreted in terms of structural differences and endowment effects? The same issue arises with respect to group differences in the IMR which reflect nonlinear group differences in the determinants of selection and in the probit coefficients. Copyright Kluwer Academic Publishers 2004

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File URL: http://hdl.handle.net/10.1023/B:JOEI.0000028395.38694.4b
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Publisher Info
Article provided by Springer in its journal The Journal of Economic Inequality.

Volume (Year): 2 (2004)
Issue (Month): 1 (April)
Pages: 3-10
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Handle: RePEc:kap:jecinq:v:2:y:2004:i:1:p:3-10

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Keywords: identification; selectivity bias; wage decompositions;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Gregory M. Duncan & Duane E. Leigh, 1980. "Wage determination in the union and non-union sectors: A sample selectivity approach," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 34(1), pages 24-34, October.
  2. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January. [Downloadable!] (restricted)
  3. Reimers, Cordelia W, 1983. "Labor Market Discrimination against Hispanic and Black Men," The Review of Economics and Statistics, MIT Press, vol. 65(4), pages 570-79, November. [Downloadable!] (restricted)
  4. Gronau, Reuben, 1974. "Wage Comparisons-A Selectivity Bias," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1119-43, Nov.-Dec.. [Downloadable!] (restricted)
  5. Oaxaca, Ronald, 1973. "Male-Female Wage Differentials in Urban Labor Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(3), pages 693-709, October. [Downloadable!] (restricted)
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  6. Oaxaca, Ronald L. & Ransom, Michael R., 1994. "On discrimination and the decomposition of wage differentials," Journal of Econometrics, Elsevier, vol. 61(1), pages 5-21, March. [Downloadable!] (restricted)
  7. Suen, Wing, 1997. "Decomposing Wage Residuals: Unmeasured Skill or Statistical Artifact?," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 555-66, July. [Downloadable!] (restricted)
  8. David Neumark, 1987. "Employers' discriminatory behavior and the estimation of wage discrimination," Special Studies Papers 227, Board of Governors of the Federal Reserve System (U.S.).
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