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:
wm = 500 + 100s
and
wf = 300 + 75s.
On average, men have 14 years of schooling and women have 12 years of schooling.
(a) What is the male-female wage differential in the labor market?
(b) Using the Oaxaca decomposition, calculate how much of this wage differential is due to discrimination?
(c) Can you think of an alternative Oaxaca decomposition that would lead to a different measure of discrimination? Which measure is better?