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A Simple Solution to the Identification Problem in Detailed Wage Decompositions

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  • Yun, Myeong-Su

    (Inha University)

Abstract

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 a dummy variable 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 paper proposes a simple and natural remedy for this problem by utilizing “normalized” regressions which enable us to identify the constant and estimates of each dummy variable. The identification problem is automatically resolved once we obtain “normalized” regression equations for two comparison groups.

Suggested Citation

  • Yun, Myeong-Su, 2003. "A Simple Solution to the Identification Problem in Detailed Wage Decompositions," IZA Discussion Papers 836, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp836
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    References listed on IDEAS

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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.
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    More about this item

    Keywords

    coefficients effect; characteristics effect; identification; invariance; detailed decomposition; normalized regression;
    All these keywords.

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • J70 - Labor and Demographic Economics - - Labor Discrimination - - - General

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