Analysing Wage Differences between the USA and Germany Using Proportional Hazards Models

We analyse differences between the wage distributions in the USA and Germany in 2001 for both women and men. The empirical analysis is based on the decomposition of differences using Cox's marginal (partial) likelihood. The approach based on rank invariant estimators such as Cox's is borrowed from the literature on failure time data. Donald et al. pioneered this approach in 2000. However, they did not use the full power of the semi‐parametric approach. Instead, they argued for using a piecewise constant hazard rate model. We improve on their work by showing that the semi‐parametric features of Cox's marginal likelihood are as appropriate for the analysis of wage decompositions and as easy to interpret. Moreover, we extend their approach by allowing for non‐linear regression effects. We show empirically that this formulation both increases the flexibility of their approach and improves the discriminatory power between wage regimes.