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Selection Bias and the Decomposition of Wage Differentials

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  • Myeong-Su Yun

    (University of Western Ontario)

Abstract

The major contribution of this paper is finding a new and general approach to decomposing log-wage differentials when selection effects are present. We divide the observed log-wage differentials between two groups into 1) differentials in predicted log-wages computed using observed individual characteristics and consistent coefficients while assuming both groups' stochastic component (unobserved individual characteristics) of log-wages to have the same mean zero, and 2) differentials caused by differences in unobserved individual characteristics (selection effects). We compute the average of the selection effects by taking sample average of the residuals of log-wages (observed log-wages minus predicted log-wages) without relying on the analytical formula(e) for computing the selection effects. Blinder-Oaxaca type decomposition can be applied for the differentials in predicted log-wages in order to find the effects of differences in observed individual characteristics and the effects of differences in coefficients. We call this approach a ``generalized selection bias (GSB) approach.'' Our approach can be implemented with any kind estimation method as long as we can obtain consistent coefficients for the log-wage equation. We illustrate our approach by applying it to the racial wage differentials among women using data from the current population survey.

Suggested Citation

  • Myeong-Su Yun, 2000. "Selection Bias and the Decomposition of Wage Differentials," Departmental Working Papers 199911, Rutgers University, Department of Economics.
    • Handle: RePEc:rut:rutres:199911
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    References listed on IDEAS

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    1. Richard Blundell & John Ham & Costas Meghir, 1989. "Unemployment and Female Labour Supply," Palgrave Macmillan Books, in: Joan Muysken & Chris Neubourg (ed.), Unemployment in Europe, chapter 1, pages 9-36, Palgrave Macmillan.
    2. Becker, Gary S., 1971. "The Economics of Discrimination," University of Chicago Press Economics Books, University of Chicago Press, edition 2, number 9780226041162, December.
    3. Rosen, Sherwin, 1987. "The theory of equalizing differences," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 12, pages 641-692, Elsevier.
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    Cited by:

    1. Sarnikar, Supriya & Sorensen, Todd A. & Oaxaca, Ronald L., 2007. "Do You Receive a Lighter Prison Sentence Because You Are a Woman? An Economic Analysis of Federal Criminal Sentencing Guidelines," IZA Discussion Papers 2870, Institute of Labor Economics (IZA).
    2. Usamah Fayez Al-Farhan, 2010. "Changes in the Gender Wage Gap in Germany during a Period of Rising Wage Inequality 1999-2006: Was it Discrimination in the Returns to Human Capital?," SOEPpapers on Multidisciplinary Panel Data Research 293, DIW Berlin, The German Socio-Economic Panel (SOEP).
    3. Ira N. Gang & Myeong-Su Yun, 2001. "The Gender Wage Gap and Discrimination, East Germany 1990-1997," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 70(1), pages 123-127.

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    More about this item

    Keywords

    decomposition analysis of wage differentials; discrimination; Heckman's two-step method; maximum likelihood estimation; selection bias;
    All these keywords.

    JEL classification:

    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J71 - Labor and Demographic Economics - - Labor Discrimination - - - Hiring and Firing

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