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Michaela Fuchs, Anja Rossen, Antje Weyh and Gabriele Wydra-Somaggio

There are a number of theories that seek to explain why women earn less than men. Empirical applications usually test these theories by taking gender-specific differences in individual and workplace-related characteristics into account. This chapter provides an overview of the most commonly used method to quantify the contribution of these factors developed by Oaxaca and Blinder. It decomposes the mean difference in the wages of men and women into a part that is explained by observable factors and into an unexplained part. The latter represents an indicator of the extent of gender discrimination in payment. However, the fact that the unexplained part also comprises the influence of endowment differences in unobserved characteristics between men and women can lead to an overestimation of the real level of discrimination. Therefore, in this chapter we discuss the challenges encountered in the quantitative assessment of wage differences.