Is Self-Employment the Answer to Caste Discrimination? Decomposing the Earnings Gap in Indian Household Nonfarm Businesses

Abstract

Using the India Human Development Survey data for 2004-05, we employ two methodologies to estimate the earnings structure of household nonfarm businesses owned by Scheduled Castes and Tribes (SCSTs) and non-SCSTs: OLS estimation of mean earnings, and quantile regressions. Correspondingly, we use two decomposition methods: the conventional Blinder-Oaxaca decomposition and Melly’s (2006) refinement of the Machado and Mata (2005) decomposition of quantile gaps. We find clear differences in characteristics between SCST-owned and non-SCST owned businesses. The Blinder-Oaxaca decomposition reveals that depending on the specification of explanatory variables, as much as 70 percent of the earnings gap could be attributed to the "unexplained" or the discriminatory component. Quantile regressions reveal that gaps are higher at lower deciles than the higher ones (both raw gaps, as well as after controlling for characteristics), and the decompositions show that the unexplained component is higher at the lower deciles than higher, suggesting that SCST-owned businesses at the lower end of the conditional distribution face greater discrimination, as compared to those at the higher end. Thus, we find strong evidence of a "sticky floor", a phenomenon observed for gender wage gaps in developing countries (in contrast to a "glass ceiling" in developed countries).