Using Additional Information in Structural Decomposition Analysis: The Path-based Approach

Structural decomposition analysis (SDA) is a well-known methodology to assess the relative importance of effects that together constitute the actual change in a variable of interest. A widely recognized problem of SDA is that the results often depend strongly on the specific decomposition formula chosen, while numerous formulae are equivalent from a theoretical point of view. This 'non-uniqueness' problem is often solved rather pragmatically, by reporting an average over (a subset of) all possible formulae. In this paper, we propose an approach that uses maximum entropy econometrics techniques to select a specific decomposition formula if additional information on one or more (but not all) determinants is available. We illustrate the method empirically by investigating the sources of change in real labour costs by industry in Spain, 1980-1994.