Question

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)

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.