Problems in Regression Decomposition of Earnings Differentials

Rahmah Ismail
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Rahmah Ismail: Fakulti Ekonomi Universiti Kebangsaan Malaysia 43600 UKM Bangi Selangor, D.E., Malaysia

Jurnal Ekonomi Malaysia, 1989, vol. 20, issue December, 61-79

Abstract: This paper examines some problem$ in implementation and interpretation of earnings differentials decomposition techniques. The utilisation of dummy variable in one single regression seems to be the simplest technique. The coefficient of dummy variable indicates a residual group differences in earnings holding measured characteristics constant. Earnings differences for different groups can be decomposed into two parts by estimating separate regressions: that attributable to differences in group characteristics and that attributable to differences in coefficients. The choice of a reference group for a categorical variable does not affect the estimated differences between parameters. But the decomposition of earnings differences is affected by weights attached to different groups. In estimating log earnings functions, dummy variables are often used for factors such as stratum, region and so on. The estimated earnings functions are then used to separate the observed earnings differentials, e.g. among different race, into various components. The decomposition of earnings differentials involves weighting which are given to a particular groups. This paper examines some problems in implementation and interpretation of these techniques. The emphasis of this paper is on the technical problems. Empirical results serve to illustrate the arguments. The results indicate that certain aspects of regression decomposition are quite sensitive to model specification and weights chosen, so that they must be interpreted with care

Date: 1989
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