Earnings Functions and the Measurement of the Determinants of Wage Dispersion

This paper extends the famous Blinder and Oaxaca (1973) discrimination
in several directions. First, the wage difference breakdown is not limited to
two groups. Second, a decomposition technique is proposed that allows analysis
of the determinants of the overall wage dispersion. The authors’ approach
combines two techniques. The first of these is popular in the field of income
inequality measurement and concerns the breakdown of inequality by population
subgroup. The second technique, very common in the literature of labor economics,
uses Mincerian earnings functions to derive a decomposition of wage differences
into components measuring 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.

However, this paper goes beyond a static analysis insofar as it succeeds in breaking
down the change over time in the overall wage dispersion and its components (both
between and within group dispersion and group overlapping) into elements related
to changes in the value of the explanatory variables and the coefficients of
those variables in the earnings functions, in the unobservable characteristics,
and in the relative size of the various groups.