Question

1. Suppose years of schooling, s, is the only variable that affects earnings. The equations for the weekly salaries of male and female workers are given by

w_m = 550 + 100s and w_f = 400 + 85s.

On average, men have 12 years of schooling and women have 14 years of schooling.

a) What is the male-female average wage differential in levels in the labor market?

b) What is the male-female average wage differential as a proportion of the male wage in the labor market?

c) Using the Blinder-Oaxaca decomposition, calculate what proportion of this average wage differential is due to discrimination. Explain whether your answer makes sense.

Answer 1

Solution (1) :

So wage differentials are mainly used as a measurement for the differences in worker ability to perform the same task and the workers' effort in performing the job at the same level, it can also be used to compare the output effort for male and female.

The wage differential can be written as:

on putting the value In the above equation from the given data in question we can have

since, on average, men have 12 years of schooling and women have 14 years of schooling thus on putting these values on the above equation

So the male-female average wage differential in the labor market is about $ 160, depending on their skill, effort, and capability

Solution (2) :

The male-female average wage differential as a proportion of the male wage in the labor market would be equal to the ratio of the total difference in the wage between the two genders and its proportion with the male wage in the market, thus it would be calculated as follows 160/1750 which would be equal to 9.15 % thus the total difference is about nine percent of the earning of the male worker in the market.

Solution (3) :

The raw wage differential is :

Here first equation of the LHS represents  Differential Due to Discrimination while the second equation shows the change in Differential Due to Difference in Skills

on putting the value In the above equation from the given data in question we can have

Definitely, our answers make sense because even though female worker has higher education they have low base pay which would have ultimately low wage output per week thus there would be low wage for them in the market and even by our equation we have shown there is a positive change in the wage of male worker duet to discrimination effect thus it proves that our calculation is correct