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The equation ln wm-ln wf = a0m-a0f +a1m*(Hm-Hf)+ Hf *(a1m- a1f ) shows different terms and...

The equation ln wm-ln wf = a0m-a0f +a1m*(Hm-Hf)+ Hf *(a1m- a1f ) shows different terms and each of the terms represents a different factor that is affecting the wage difference between women and men. What is the factor that represents the effect of discrimination on wage difference? (Oaxaca Decomposition Equation)

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Answer #1

Oaxaca decomposition effect can be understood by following -

The earnings for male and female are given by the following two equations -

  1. ln(W_m) = X_m\beta_m + \mu_m
  2. ln(W_f) = X_f\beta_f + \mu_f

Here X is a vector of explanatory variables which may affect the wages like education, work experience, occupation, etc. \beta_m, \beta_f are the coefficients to explain the affect of these variables for male and female respectively and \mu_m, \mu_f are the corresponding error term.

The total difference in wages for both genders can be expressed by,

\Delta ln W = ln \overline{W_m} - ln \overline{W_f}

where \overline{W_m}, \overline{W_f} are the mean wages of male and female respectively.

The Oaxaca-Blinder decomposition equation is-

ln \overline{W_m} - ln \overline{W_f} =\overline X_mb_m - \overline X_fb_f + \overline X_fb_m - \overline X_fb_m

where b_m, b_f are the estimators of \beta_m, \beta_f respectively.

Thus, ln \overline{W_m} - ln \overline{W_f} = (\overline X_m - \overline X_f)b_m +(b_m - b_f) \overline X_f

Where the first term (\overline X_m - \overline X_f)b_m refers to differences in characteristics between males and females and the second term (b_m - b_f) \overline X_f captures the discrimination effect.

Matching this form with our given equation,

the last term H_f^*(a_{1m} - a_{1f}) represents the effect of discrimination on wage difference.

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