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A Simple Solution to the Identification Problem in Detailed Wage Decompositions

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Myeong-Su Yun

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Abstract

Oaxaca and Ransom (1999) show that a detailed decomposition of the coefficients effect is destined to suffer from an identification problem since the detailed coefficients effect attributed to dummy variables is not invariant to the choice of reference groups. It turns out that the identification problem in the decomposition equation is a disguised identification problem of constant and dummy variables in a regression equation. This article proposes a simple and natural remedy for this problem by using "normalized" regressions, which enable me to identify the constant and estimates of each dummy variable. (JEL C20, J70) Copyright 2005, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/ei/cbi053
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Publisher Info
Article provided by Oxford University Press in its journal Economic Inquiry.

Volume (Year): 43 (2005)
Issue (Month): 4 (October)
Pages: 766-772
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Handle: RePEc:oup:ecinqu:v:43:y:2005:i:4:p:766-772

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Find related papers by JEL classification:
C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
J70 - Labor and Demographic Economics - - Labor Discrimination - - - General

References listed on IDEAS
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. John P. Haisken-DeNew & Christoph M. Schmidt, . "Inter-Industry and Inter-Region Differentials: Mechanics and Interpretation," Working Papers 9504, SELAPO Center for Human Resources. [Downloadable!]
  2. Edin, Per-Anders & Zetterberg, Johnny, 1992. "Interindustry Wage Differentials: Evidence from Sweden and a Comparison with the United States," American Economic Review, American Economic Association, vol. 82(5), pages 1341-49, December. [Downloadable!] (restricted)
  3. Ham, John C & Svejnar, Jan & Terrell, Katherine, 1998. "Unemployment and the Social Safety Net during Transitions to a Market Economy: Evidence from the Czech and Slovak Republics," American Economic Review, American Economic Association, vol. 88(5), pages 1117-42, December. [Downloadable!] (restricted)
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  4. Greene, William H & Seaks, Terry G, 1991. "The Restricted Least Squares Estimator: A Pedagogical Note," The Review of Economics and Statistics, MIT Press, vol. 73(3), pages 563-67, August. [Downloadable!] (restricted)
  5. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-93, March. [Downloadable!] (restricted)
  6. Kennedy, Peter, 1986. "Interpreting Dummy Variables," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 174-75, February. [Downloadable!] (restricted)
  7. 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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  8. Radchenko, Stanislav I. & Yun, Myeong-Su, 2003. "A Bayesian approach to decomposing wage differentials," Economics Letters, Elsevier, vol. 78(3), pages 431-436, March. [Downloadable!] (restricted)
  9. William C. Horrace & Ronald L. Oaxaca, 2001. "Inter-industry wage differentials and the gender wage gap: An identification problem," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 54(3), pages 611-618, April.
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Cited by:
(explanations, 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. Filipe Almeida-Santos & Karen Mumford, 2006. "Employee Training, Wage Dispersion and Equality in Britain," IZA Discussion Papers 2276, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. Nestmann, Thorsten, 2005. "German bank lending to industrial and non-industrial countries: driven by fundamentals or different treatment?," Discussion Paper Series 2: Banking and Financial Studies 2005,08, Deutsche Bundesbank, Research Centre. [Downloadable!]
  3. Carlos Gradín, 2007. "Why Is Poverty So High Among Afro-Brazilians? A Decomposition Analysis of the Racial Poverty Gap," IZA Discussion Papers 2809, Institute for the Study of Labor (IZA). [Downloadable!]
  4. Ira N. Gang & Robert C. Stuart & Myeong-Su Yun, 2006. "Wage Growth and Inequality Change During Rapid Economic Transition," Departmental Working Papers 200631, Rutgers University, Department of Economics. [Downloadable!]
  5. Robert Elliott & Joanne Kathryn Lindley, 2006. "Immigrant Wage Differentials, Ethnicity and Occupational Clustering," Working Papers 2006008, The University of Sheffield, Department of Economics, revised May 2006. [Downloadable!]
  6. Myeong-Su Yun, 2005. "Normalized Equation and Decomposition Analysis: Computation and Inference," IZA Discussion Papers 1822, Institute for the Study of Labor (IZA). [Downloadable!]
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