Identification problem and detailed Oaxaca decomposition: A general solution and inference

Article type: Research Article

Authors: Yun, Myeong-Su^a

Affiliations: [a] Department of Economics, Tulane University, 206 Tilton Hall, New Orleans, LA 70118 USA. Tel.: +1 504 862 8356; Fax: +1 504 865 5869; E-mail: msyun@tulane.edu

Abstract: It is well-known that the standard Oaxaca decomposition method on wage differentials produces arbitrary results when calculating the coefficients effect of sets of dummy variables: the estimated sum of coefficients effects of sets of dummy variables is not invariant to the choice of reference groups. We generalize this identification problem in the detailed Oaxaca decomposition and its solution based on a normalized equation to a decomposition analysis for differences in the first moment where linear or non-linear (e.g., probit or logit) models can be used for estimation. We provide a practical and simple algorithm to derive the normalized equation, and show that using normalized equation does not change the size and inference of the overall characteristics and coefficients effects.

Keywords: Detailed decomposition, identification, characteristics effect, coefficients effect, normalized equation

DOI: 10.3233/JEM-2008-0296

Journal: Journal of Economic and Social Measurement, vol. 33, no. 1, pp. 27-38, 2008