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IZA
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A Simple Solution to the Identification Problem in Detailed Wage Decompositions
by
Myeong-Su Yun
(July 2003)
published in: Economic Inquiry, 2005, 43 (4), 766-772
Abstract:
Oaxaca and Ransom (1999) show that a detailed decomposition of the coefficients effect is
destined to suffer from an identification problem since the detailed coefficients effect
attributed to a dummy variable is not invariant to the choice of reference groups. It turns out
that the identification problem in the decomposition equation is a disguised identification
problem of constant and dummy variables in a regression equation. This paper proposes a
simple and natural remedy for this problem by utilizing “normalized” regressions which enable
us to identify the constant and estimates of each dummy variable. The identification problem
is automatically resolved once we obtain “normalized” regression equations for two
comparison groups.
Text: See Discussion Paper No. 836 
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