Decomposing changes in wage distributions: a unified approach

Over the last fifteen years, many researchers have attempted to explain the determinants and changes of wage inequality. I propose a simple procedure to decompose changes in the distribution of wages or in other distributions into three factors: changes in regression coefficients; the distribution of covariates, and residuals. The procedure requires only estimating standard OLS regressions augmented by a logit or probit model. It can be extended by modelling residuals as a function of unmeasured skills and skill prices. Two empirical examples showing how the procedure works in practice are considered. In the first example, sources of differences in the wage distribution in Alberta and British Columbia are considered; in the second, sources of change in overall wage inequality in the United States, 1973-99, are re-examined. Finally, the proposed procedure is compared with existing procedures.