An extension of the Oaxaca decomposition using generalized residuals

Abstract

This paper proposes an extension of the Oaxaca decomposition equation using generalized residuals. The proposed extension is so general that it enables researchers to study wage differentials whatever complicating econometric issues exist, e.g., selection, simultaneity and endogeneity, and whatever econometric techniques are used in order to obtain consistent estimates of wage equations. The key insight is that the residuals effect in the decomposition equation is identical to the differences in average generalized residuals which represent differences in the average effects of selection, simultaneity and endogeneity on wages. Decomposing the racial wage gap with the selection bias correction model, the empirical illustration shows how to implement this extension.