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A Simple Solution to the Identification Problem in Detailed Wage Decompositions

  • Myeong-Su Yun

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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Article provided by Western Economic Association International 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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  1. John P. Haisken-DeNew & Christoph M. Schmidt, 2000. "Interindustry and Interregion Differentials: Mechanics and Interpretation," The Review of Economics and Statistics, MIT Press, vol. 79(3), pages 516-521, August.
  2. Ronald Oaxaca, 1971. "Male-Female Wage Differentials in Urban Labor Markets," Working Papers 396, Princeton University, Department of Economics, Industrial Relations Section..
  3. Kennedy, Peter, 1986. "Interpreting Dummy Variables," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 174-75, February.
  4. F. L. Jones, 1983. "On Decomposing the Wage Gap: A Critical Comment on Blinder's Method," Journal of Human Resources, University of Wisconsin Press, vol. 18(1), pages 126-130.
  5. 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, Cornell University, ILR School, vol. 54(3), pages 611-618, April.
  6. Radchenko, Stanislav I. & Yun, Myeong-Su, 2003. "A Bayesian approach to decomposing wage differentials," Economics Letters, Elsevier, vol. 78(3), pages 431-436, March.
  7. 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.
  8. John Ham & Jan Svejnar & Katherine Terrell, 1998. "Unemployment and the Social Safety Net During Transitions to a Market Economy: Evidence from the Czech and Slovak Republic," William Davidson Institute Working Papers Series 169, William Davidson Institute at the University of Michigan.
  9. 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.
  10. 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.
  11. 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.
  12. Ronald L. Oaxaca & Michael R. Ransom, 1999. "Identification in Detailed Wage Decompositions," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 154-157, February.
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