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Earnings Functions and the Measurement of the Determinants of Wage Dispersion Extending Oaxaca’s Approach

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Joseph Deutsch
Jacques Silber

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Abstract

This paper extends the famous Blinder (1973) and Oaxaca (1973) discrimination in several directions. First, the wage difference breakdown is not limited to two groups. Second, a decomposition technique is proposed that allows analysis of the determinants of the overall wage dispersion. The authors’ approach combines two techniques. The first of these is popular in the field of income inequality measurement and concerns the breakdown of inequality by population subgroup. The second technique, very common in the literature of labor economics, uses Mincerian earnings functions to derive a decomposition of wage differences into components measuring group differences in the average values of the explanatory variables, in the coefficients of these variables in the earnings functions, and in the unobservable characteristics. This methodological novelty allows one to determine the exact impact of each of these three elements on the overall wage dispersion, on the dispersion within and between-groups, and on the degree of overlap between the wage distributions of the various groups. However, this paper goes beyond a static analysis insofar as it succeeds in breaking down the change over time in the overall wage dispersion and its components (both between and within group dispersion and group overlapping) into elements related to changes in the value of the explanatory variables and the coefficients of those variables in the earnings functions, in the unobservable characteristics, and in the relative size of the various groups.

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Paper provided by Levy Economics Institute, The in its series Economics Working Paper Archive with number wp_521.

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Date of creation: Nov 2007
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Handle: RePEc:lev:wrkpap:wp_521

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  1. Levy, Frank & Murnane, Richard J, 1992. "U.S. Earnings Levels and Earnings Inequality: A Review of Recent Trends and Proposed Explanations," Journal of Economic Literature, American Economic Association, vol. 30(3), pages 1333-81, September. [Downloadable!] (restricted)
  2. Topel, Robert H, 1997. "Factor Proportions and Relative Wages: The Supply-Side Determinants of Wage Inequality," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 55-74, Spring. [Downloadable!] (restricted)
  3. Chiswick, Barry R, 1978. "The Effect of Americanization on the Earnings of Foreign-born Men," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 897-921, October. [Downloadable!] (restricted)
  4. Fortin, Nicole M & Lemieux, Thomas, 1997. "Institutional Changes and Rising Wage Inequality: Is There a Linkage?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 75-96, Spring. [Downloadable!] (restricted)
  5. Borjas, George J, 1985. "Assimilation, Changes in Cohort Quality, and the Earnings of Immigrants," Journal of Labor Economics, University of Chicago Press, vol. 3(4), pages 463-89, October. [Downloadable!] (restricted)
  6. Goldin, Claudia & Margo, Robert A, 1992. "The Great Compression: The Wage Structure in the United States at Mid-century," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 1-34, February. [Downloadable!] (restricted)
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  7. Barry R. Chiswick, 1998. "Hebrew language usage: Determinants and effects on earnings among immigrants in Israel," Journal of Population Economics, Springer, vol. 11(2), pages 253-271. [Downloadable!] (restricted)
  8. Blau, Francine D & Kahn, Lawrence M, 1996. "Wage Structure and Gender Earnings Differentials: An International Comparison," Economica, London School of Economics and Political Science, vol. 63(250), pages S29-62, Suppl.. [Downloadable!] (restricted)
  9. Welch, Finis, 1979. "Effects of Cohort Size on Earnings: The Baby Boom Babies' Financial Bust," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages S65-97, October. [Downloadable!] (restricted)
  10. Berger, Mark C, 1985. "The Effect of Cohort Size on Earnings Growth: A Reexamination of the Evidence," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 561-73, June. [Downloadable!] (restricted)
  11. Dagum, Camilo, 1997. "A New Approach to the Decomposition of the Gini Income Inequality Ratio," Empirical Economics, Springer, vol. 22(4), pages 515-31.
  12. Finis Welch, 1979. "Effects of Cohort Size on Earnings: The Baby Boom Babies' Financial Bust," UCLA Economics Working Papers 146, UCLA Department of Economics. [Downloadable!]
  13. Freeman, Richard B, 1995. "Are Your Wages Set in Beijing?," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 15-32, Summer. [Downloadable!] (restricted)
  14. 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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  15. Friedberg, Rachel M, 2000. "You Can't Take It with You? Immigrant Assimilation and the Portability of Human Capital," Journal of Labor Economics, University of Chicago Press, vol. 18(2), pages 221-51, April. [Downloadable!] (restricted)
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  16. Johnson, George E, 1997. "Changes in Earnings Inequality: The Role of Demand Shifts," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 41-54, Spring. [Downloadable!] (restricted)
  17. George J. Borjas, 1994. "The Economics of Immigration," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1667-1717, December. [Downloadable!] (restricted)
  18. Francine D. Blau & Lawrence M. Kahn, 2000. "Gender Differences in Pay," NBER Working Papers 7732, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Wood, Adrian, 1995. "How Trade Hurt Unskilled Workers," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 57-80, Summer. [Downloadable!] (restricted)
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  1. Stéphane Mussard & Pi Alperin María Noel & Françoise Seyte & Michel Terraza, 2005. "Extensions Of Dagum’S Gini Decomposition," Cahiers de recherche 05-07, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke. [Downloadable!]
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