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Unexplained Gaps and Oaxaca-Blinder Decompositions

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  • Todd E. Elder
  • John H. Goddeeris
  • Steven J. Haider

Abstract

We analyze four methods to measure unexplained gaps in mean outcomes: three decompositions based on the seminal work of Oaxaca (1973) and Blinder (1973) and an approach involving a seemingly naïve regression that includes a group indicator variable. Our analysis yields two principal findings. We first show that a commonlyused pooling decomposition systematically overstates the contribution of observable characteristics to mean outcome differences, therefore understating unexplained differences. We also show that the coefficient on a group indicator variable from an OLS regression is an attractive approach for obtaining a single measure of the unexplained gap. We then provide three empirical examples that explore the practical importance of our analytic results.

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Bibliographic Info

Paper provided by Centre for Economic Policy Research, Research School of Economics, Australian National University in its series CEPR Discussion Papers with number 600.

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Date of creation: Feb 2009
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Handle: RePEc:auu:dpaper:600

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Keywords: decompositions; discrimination;

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  1. Kostas G. Mavromaras & Helmut Rudolph, 1997. "Wage Discrimination in the Reemployment Process," Journal of Human Resources, University of Wisconsin Press, vol. 32(4), pages 812-860.
  2. Fairlie, Robert W. & Robb, Alicia, 2004. "Why Are Black-Owned Businesses Less Successful than White-Owned Businesses? The Role of Families, Inheritances, and Business Human Capital," IZA Discussion Papers 1292, Institute for the Study of Labor (IZA).
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  4. Jacob, Brian A., 2002. "Where the boys aren't: non-cognitive skills, returns to school and the gender gap in higher education," Economics of Education Review, Elsevier, Elsevier, vol. 21(6), pages 589-598, December.
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  7. Oaxaca, Ronald L. & Ransom, Michael R., 1994. "On discrimination and the decomposition of wage differentials," Journal of Econometrics, Elsevier, Elsevier, vol. 61(1), pages 5-21, March.
  8. David Neumark, 1987. "Employers' discriminatory behavior and the estimation of wage discrimination," Special Studies Papers, Board of Governors of the Federal Reserve System (U.S.) 227, Board of Governors of the Federal Reserve System (U.S.).
  9. Roland G. Fryer, Jr. & Steven D. Levitt, 2002. "Understanding the Black-White Test Score Gap in the First Two Years of School," NBER Working Papers 8975, National Bureau of Economic Research, Inc.
  10. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(3), pages 693-709, October.
  11. Thomas DeLeire, 2001. "Changes in Wage Discrimination against People with Disabilities: 1984-93," Journal of Human Resources, University of Wisconsin Press, vol. 36(1), pages 144-158.
  12. Ben Jann, 2008. "The Blinder–Oaxaca decomposition for linear regression models," Stata Journal, StataCorp LP, StataCorp LP, vol. 8(4), pages 453-479, December.
  13. Kathryn Yount, 2008. "Gender, resources across the life course, and cognitive functioning in Egypt," Demography, Springer, Springer, vol. 45(4), pages 907-926, November.
  14. 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.
  15. Derek A. Neal & William R. Johnson, 1995. "The Role of Pre-Market Factors in Black-White Wage Differences," NBER Working Papers 5124, National Bureau of Economic Research, Inc.
  16. Alan S. Blinder, 1973. "Wage Discrimination: Reduced Form and Structural Estimates," Journal of Human Resources, University of Wisconsin Press, vol. 8(4), pages 436-455.
  17. Joni Hersch & Leslie S. Stratton, 2002. "Housework and Wages," Journal of Human Resources, University of Wisconsin Press, vol. 37(1), pages 217-229.
  18. Maury Gittleman & Edward N. Wolff, 2004. "Racial Differences in Patterns of Wealth Accumulation," Journal of Human Resources, University of Wisconsin Press, vol. 39(1).
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