What Explains Caste-based Wage Inequalities and Earning Gaps in the Indian Labour Market? Theil and Oaxaca Decomposition Analysis

Abstract

Caste-based wage discrimination can counteract the development process. This article uses two distinct estimation methods to examine earning gaps between forward castes also referred to as ‘general category’ workers and traditionally disadvantaged or ‘backward caste’ workers in the Indian labour market. First, we interpret the inequality indicator of the Theil index and decompose Theil to show within and between-group inequalities. Second, a Threefold Oaxaca Decomposition is employed to break earnings differentials into components of endowment, coefficient and interaction. Earning gaps are examined separately in urban and rural divisions. Within-group inequalities are found larger than between groups across variables, with a higher overall inequality for forward castes. Wage differentials are substantially greater for urban areas and favour FC. A high endowment implies pre-market discrimination in human capital investments such as nutrition and education. Policymakers should first invest in basic quality education and simultaneously expand postgraduate diploma opportunities, subsequently increasing participation in the labour force for traditionally disadvantaged in disciplines and occupations where forward castes have long dominated.

JEL Codes: J01, J08, J15, J30, J31, J71