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Earnings Functions and the Measurement of the Determinants of Wage Dispersion: Extending Oaxaca’s Approach

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  • Joseph Deutsch
  • Jacques Silber

Abstract

This paper extends the famous Blinder (1973) and Oaxaca (1973) discrimination in several directions. First, the wage difference breakdown is not limited to two groups. Second, a decomposition technique is proposed that allows analysis of the determinants of the overall wage dispersion. The authors’ approach combines two techniques. The first of these is popular in the field of income inequality measurement and concerns the breakdown of inequality by population subgroup. The second technique, very common in the literature of labor economics, uses Mincerian earnings functions to derive a decomposition of wage differences into components measuring group differences in the average values of the explanatory variables, in the coefficients of these variables in the earnings functions, and in the unobservable characteristics. This methodological novelty allows one to determine the exact impact of each of these three elements on the overall wage dispersion, on the dispersion within and between-groups, and on the degree of overlap between the wage distributions of the various groups. However, this paper goes beyond a static analysis insofar as it succeeds in breaking down the change over time in the overall wage dispersion and its components (both between and within group dispersion and group overlapping) into elements related to changes in the value of the explanatory variables and the coefficients of those variables in the earnings functions, in the unobservable characteristics, and in the relative size of the various groups.

Suggested Citation

  • Joseph Deutsch & Jacques Silber, 2007. "Earnings Functions and the Measurement of the Determinants of Wage Dispersion: Extending Oaxaca’s Approach," Economics Working Paper Archive wp_521, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_521
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    References listed on IDEAS

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    1. Claudia Goldin & Robert A. Margo, 1992. "The Great Compression: The Wage Structure in the United States at Mid-Century," The Quarterly Journal of Economics, Oxford University Press, vol. 107(1), pages 1-34.
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    3. Nicole M. Fortin & Thomas Lemieux, 1997. "Institutional Changes and Rising Wage Inequality: Is There a Linkage?," Journal of Economic Perspectives, American Economic Association, pages 75-96.
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    Cited by:

    1. Stéphane Mussard & Pi Alperin María Noel & Françoise Seyte & Michel Terraza, 2005. "Extensions Of Dagum’S Gini Decomposition," Cahiers de recherche 05-07, Departement d'Economique de l'École de gestion à l'Université de Sherbrooke.
    2. João Sousa Andrade & Adelaide Duarte & Marta Simões, 2010. "The impact of EU integration on the Portuguese distribution of employees' earnings," GEMF Working Papers 2010-08, GEMF, Faculty of Economics, University of Coimbra.

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