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Estimating the Variance of Decomposition Effects

Author

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  • Takuya Hasebe

    (Faculty of Liberal Arts, Sophia University)

Abstract

We derive the asymptotic variance of the Blinder-Oaxaca decomposition effects. We show that the delta method approach that builds on the assumption of fixed regressors understates true variability of the decomposition effects when regressors are stochastic. Our proposed variance estimator takes randomness of regressors into consideration. Our approach is applicable to both the linear and nonlinear decompositions, for the latter of which only a bootstrap method is an option. As our derivation follows the general framework of m-estimation, it is straightforward to extend to the cluster-robust variance estimator. We demonstrate the finite-sample performance of our variance estimator with a Monte Carlo study and present a real-data application.

Suggested Citation

  • Takuya Hasebe, 2015. "Estimating the Variance of Decomposition Effects," Working Papers 6, City University of New York Graduate Center, Ph.D. Program in Economics.
    • Handle: RePEc:cgc:wpaper:006
    as

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    References listed on IDEAS

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    1. 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.
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    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • J70 - Labor and Demographic Economics - - Labor Discrimination - - - General

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