• women's and men's wages are estimated separately.
• the difference between men's and women's wages is divided into a part explained by the differences of characteristics (endowment effect) and a part left unexplained by the structural causes.
• the part left is the discrimination (remuneration effect).

Further development of Oaxaca-Blinder decomposition is the John-Murphy-Pierce approach, which can measure the pay gaps between countries by identifying gender specific factors and the differences of factors deriving from the specific labour market characteristics of the countries.

The logic behind this is rather straightforward. Since women, on average, tend to have less labour market experience than men and work in different occupations, the gender pay gap will increase if the return to experience will increase or if the occupational wage differences will increase. ‘If, as the human capital model suggests, women have less experience than men, on average, the higher the return to experience received by workers regardless of sex, the larger will be the gender gap in pay."
The institutional factors that determine wages are, for instance, collective agreements. As a consequence of the agreements of national or industry level, for example, the wage differences between industries and/or companies tend to decrease which mitigates the pay gap between men and women. The increase of the minimum wage has a beneficial effect on the reduction of the pay gap considering the fact that the wage distribution of women is usually lower than that of men.

"Rubery argues that the increasing interest in gender pay equality in the EU needs to be translated into an active debate on the gender effect of pay policies. The importance of this gender mainstreaming approach is that it shifts the focus from female deficits or deficiencies to discrimination within policies and practices as embedded in institutional arrangements, social norms, market system and pay policies." Social underevaluation of women's work can often be traced in industries where dominantly women work. Women work in high concentration in underpaid sectors and professions. This cannot be explained by productivity differences between sectors or professions.

Source of quotations: The Gender pay gap. Origins and policy responses, European Commission, 2006