Detailed Gender Wage Gap Decompositions: Controlling for Worker Unobserved Heterogeneity Using Network Theory

Abstract: Recent advances in the literature of decomposition methods in economics have allowed for the identification and estimation of detailed wage gap decompositions. In this context, building reliable counterfactuals requires using tighter controls to ensure that similar workers are correctly identified by making sure that important unobserved variables such as skills are controlled for, as well as comparing only workers with similar observable characteristics. This paper contributes to the wage decomposition literature in two main ways: (i) developing an economic principled network based approach to control for unobserved worker skills heterogeneity in the presence of potential discrimination; and (ii) extending existing generic decomposition tools to accommodate for potential lack of overlapping supports in covariates between groups being compared, which is likely to be the norm in more detailed decompositions. We illustrate the methodology by decomposing the gender wage gap in Brazil.