Revisiting the earned income gap for Indigenous and non-Indigenous Australian workers: Evidence from a selection bias corrected model

Abstract

Indigenous Australians perform worse in the labour market than non-Indigenous Australians, particularly in terms of earned income. Improving Indigenous Australians’ earnings is paramount to improving their health and living standards and for the Closing the Gap targets. Most literature on this issue is now outdated or controls for limited variables. This article revisits the earned income gap for Indigenous Australians using the standard Oaxaca decomposition. It also estimates the gap using decompositions that correct for selection-bias in the fact that a population of workers is a non-random sample. It finds that two-thirds and three-quarters of the earnings penalty experienced by Indigenous men and women working full time is explained by differences in their endowments, especially education levels, compared to non-Indigenous Australians. The remainder of the earnings gap, being 9.3% for males and 4.3% for females, is potentially linked to discrimination and selection bias as Indigenous people have low full-time employment rates. Increasing Indigenous Australians participation in higher education is imperative for reducing the earnings penalty they face. Selection-bias is also important for examining earnings, and whilst it has interpretive problems, it may contribute to explaining the underlying earnings gap faced by Indigenous workers.