Question

Suppose years of schooling, s, is the only variable that affects earnings. The equations for the weekly salaries (W) of male (m) and female (f) workers are given by: Wm = 340 + 150sm [αm +βm(Sm)] Wf = 317 + 119sf [αf +βf(Sf)] On average, men have 14 years of schooling and women have 13 years of schooling. The Oaxaca decomposition formula is given as follows: ΔW = (αm – αf) + (βm – βf)Sf + βm(Sm – Sf) Where, (αm – αf) + (βm – βf)Sf = Discrimination And, βm(Sm – Sf) = Difference in skills (warranted difference)

a. What is the male-female wage differential in the labor market?

b. Graph part (a).

c. Using the Oaxaca decomposition, calculate how much of this wage differential is due to discrimination (in absolute terms, and as a percentage of the wage differential). d. Using the Oaxaca decomposition, calculate how much of this wage differential stems from a difference in skills (in absolute terms, and as a percentage of the wage differential).

e. Suppose that the weekly salaries for females changes to reflect Wf = 335 + 122sf. What impact does this change have on:

(1) The male-female wage differential in the labor market?

(2) he discrimination portion of the wage differential?

(3) The overall level of discrimination?

(4) Why might economists concern themselves with the Oaxaca decomposition measure?

Answer 1