Decomposing Differences between Groups

Somewhat divergent approaches to finding the components of group differences (for example, the difference in average earnings across gender or racial groups) have grown up in the literatures of economics and sociology. Both, however, are variants of the same underlying approach. This article illustrates different approaches and draws attention to the conditions under which two, three, or four components of the income gap between groups can be usefully distinguished. The two central issues are which standard one uses to evaluate endowment differences between groups, and whether the scales used to operationalize underlying concepts have arbitrary zero-points or not. This latter difficulty has often been neglected in empirical applications using variables such as education, region, occupation, industry, and marital status. In such cases, the choice of a comparison group is inherently arbitrary, and nothing other than an arbitrary decomposition of the residual group difference can result.