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Accounting for the Black-White Wealth Gap: A Nonparametric Approach

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  • Robert Barsky
  • John Bound
  • Kerwin Charles
  • Joseph Lupton

Abstract

This paper notes a potential problem in the method of Blinder and Oaxaca the most popular method in the literature for decomposing the mean difference between groups of a given variable into the portion attributable to differences in the distribution of some explanatory variables and differences in the conditional expectation functions. In its conventional application, the Blinder-Oaxaca method requires that a parametric assumption be made about the form of the conditional expectations function. We show that misspecification is likely to result in non-trivial errors in inference regarding the portion attributable to differences in the distribution of explanatory variables. A nonparametric alternative to the Blinder-Oaxaca method is proposed. Rather than specify an arbitrary functional form for the conditional expectations function, the method re-weights the empirical distribution of the outcome variable using weights that equalize the empirical distributions of the explanatory variable. Applying this method to the large black-white gap in net worth, we document a substantial difference in the estimated role of earnings differences between the two methods. Our estimates suggest that differences in earnings account for roughly two-thirds of the overall wealth gap.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8466.

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Date of creation: Sep 2001
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Handle: RePEc:nbr:nberwo:8466

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