Earnings functions and the measurement of the determinants of wage dispersion: extending the Blinder-Oaxaca approach

This paper is an extension of Blinder's (1973) and Oaxaca's (1973) famous decomposition. While they looked at the determinants of the wage gap between two groups, this paper not only considers any number of groups but it also proposes a decomposition technique that permits to analyze the determinants of the overall wage dispersion. The approach presented combines two techniques. The first one, popular in the field of income inequality measurement, concerns the breakdown of inequality by population subgroups. The second one, very common in the labor economics literature, uses Mincerian earnings functions to derive a decomposition of wage differences between two groups into components measuring, respectively, 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. This paper goes, however, beyond a static analysis in so far as it succeeds in breaking down the change over time in the overall wage dispersion and its components (between- and within-groups dispersion and group overlapping) into elements related to changes in the value of the explanatory variables and the coefficients of these variables in the earnings functions, in the unobservable characteristics and in the relative size of the various groups. The empirical illustration of this paper looks at data obtained from income surveys conducted in Israel in 1982, 1990, and 1998, special emphasis being put on the comparison between the earnings of new immigrants and those of natives or older immigrants.