Blinder–Oaxaca decomposition

[1] Ronald Oaxaca introduced this method in economics in his doctoral thesis at Princeton University and eventually published in 1973.

[3] Oaxaca's original research question was the wage differential between two different groups of workers (male vs. female), but the method has since been applied to numerous other topics.

Then, since the average value of residuals in a linear regression is zero, we have: The first part of the last line of (3) is the impact of between-group differences in the explanatory variables X, evaluated using the coefficients for group A.

For example, David Card and Alan Krueger found in a paper entitled, "School Quality and Black-White Relative Earnings: A Direct Assessment"[5] that improvements in the quality of schools for Black men born in the Southern states of the United States between 1915 and 1966 increased the return to education for these men, leading to narrowing of the black-white earnings gap.

Thus, some of this lower β coefficient reflected a difference in the quality of education for Black workers which could have otherwise been interpreted as an effect of direct discrimination; differences in the quality of education for Black workers would reflect historical or 'indirect' discrimination against them.