Earnings Functions and the Measurement of the Determinants of Wage Dispersion: Extending Oaxaca's Approach

This paper extends the famous Blinder (1973) and Oaxaca (1973) discrimination analysis in several directions. First the wage difference breakdown is not limited to two groups. Second a decomposition technique is proposed that allows analyzing the determinants of the overall wage dispersion. The approach presented combines two techniques. The first one is popular in the field of income inequality measurement and concerns the breakdown of inequality by population subgroups. The second one, very common in the labor economics literature, uses Mincerian earnings functions to derive a decomposition of wage differences into components measuring respectively group differences in the average values of the explanatory variables, in the coefficients of these variables in the earnings functions and in the unobservable characteristics. This methodological novelty allows one to determine the exact impact of each of these three elements on the overall wage dispersion, on the dispersion within and between groups and on the degree of overlap between the wage distributions of the various groups.