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Decompositions. Cheat Sheet

The document explains the Blinder-Oaxaca decomposition technique, which decomposes outcome variables into explained and unexplained variation. It uses wage differentials between men and women as an example, constructing a counterfactual equation to understand differences due to education (explained) versus unexplained differences like discrimination. The Blinder-Oaxaca decomposition equation combines characteristics effects (explained variation) and coefficients effects (unexplained variation). Stata has an "oaxaca" command that performs this decomposition.

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Nilay Kumar
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236 views2 pages

Decompositions. Cheat Sheet

The document explains the Blinder-Oaxaca decomposition technique, which decomposes outcome variables into explained and unexplained variation. It uses wage differentials between men and women as an example, constructing a counterfactual equation to understand differences due to education (explained) versus unexplained differences like discrimination. The Blinder-Oaxaca decomposition equation combines characteristics effects (explained variation) and coefficients effects (unexplained variation). Stata has an "oaxaca" command that performs this decomposition.

Uploaded by

Nilay Kumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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The

Blinder-Oaxaca Decomposition

Uses: Decomposes outcome variables into explained/unexplained variation. For example decomposes
wages into explained variation (e.g. level of schooling) and unexplained variation (e.g. discrimination, new
policies or structural changes).

Example: Male/Female Wage Differentials


W = wages; = intercept; = coefficient of years of schooling (S ); = error term; M = men; F = women.



WF = F + F SF + F
WM = M + M SM + M

M W
F
*We want to understand: W

We want to look at wage differentials between men and women, so we construct a counterfactual equation
(intercept & coefficient replaced with those from mens equation).

WF = M +

M SF


*We want to understand:


+ F

M
W

F = W
M
W

F + W
F
W

F
W

Difference due to
education

Unexplained
difference

The Blinder-Oaxaca decomposition equation is a combination of:


Characteristics effects (explained variation):WM


F =
W


Visual Examples:

M ( SM

M ( SM

F = (M
W

Coefficients effects (unexplained variation): WF


M
W

F =
W


SF ) + (M

F ) + (

F ) + (

Total
Difference

Characteristics
Effects

Discrimination
Effects

F ) SF

F )
S

F )SF


Stata Applications:

As of 2010 an oaxaca command is available in Stata that computes the Blinder-Oaxaca decomposition.
This should come standard on new versions of Stata, but if you dont have it you can download it from
SSC (the makers of Stata).

*decompose & decomp are older versions of the same command.



Syntax:


Relevant Sources for Further Reading:
Blinder-Oaxaca Decomposition Technique." International Encyclopedia of the Social Sciences. 2008.
Encyclopedia.com. <http://www.encyclopedia.com>

Explaining Differences between Groups: Oaxaca Decomposition. Health Equity, Ch. 12. The World Bank.
<http://siteresources.worldbank.org/INTPAH/Resources/Publications/459843-
1195594469249/HealthEquityCh12.pdf>

A Stata implementation of the Blinder-Oaxaca decomposition. The Stata Journal. May 2008. ETH Zurich
Sociology. <http://www.ssc.wisc.edu/~jmuniz/jann_oaxaca.pdf>

St: New version of -oaxaca- available from SSC. The Stata Listserve. Jan 2010.
<http://www.stata.com/statalist/archive/2010-01/msg00042.html>

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