Unexplained Gaps and Oaxaca-Blinder Decompositions
25 Pages Posted: 14 Feb 2009
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Unexplained Gaps and Oaxaca-Blinder Decompositions
Date Written: February 2009
Abstract
We analyze four methods to measure unexplained gaps in mean outcomes: three decompositions based on the seminal work of Oaxaca (1973) and Blinder (1973) and an approach involving a seemingly naive regression that includes a group indicator variable. Our analysis yields two principal findings. We first show that a commonly-used pooling decomposition systematically overstates the contribution of observable characteristics to mean outcome differences, therefore understating unexplained differences. We also show that the coefficient on a group indicator variable from an OLS regression is an attractive approach for obtaining a single measure of the unexplained gap. We then provide three empirical examples that explore the practical importance of our analytic results.
Keywords: decompositions, discrimination
JEL Classification: J24, J31, J15, J16
Suggested Citation: Suggested Citation
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