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Returns to Education and Increasing Wage Inequality in Latin America

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  • Chiara Binelli

    (Oxford University, UK; Institute for Fiscal Studies, UK and The Rimini Centre for Economic Analysis, Italy)

Abstract

This paper studies a central feature that characterized the changes in wage inequality in Latin America in the 1990s: log wages became a convex function of the level of education. The wage gap between Higher and Intermediate Education increased and the one between Intermediate and Basic Education declined. The double change in the wage differentials was driven by a significant drop in the mean wage at Intermediate. I develop and simulate a dynamic general equilibrium model of savings and educational choices under credit constraints and uninsurable earnings' risk in which ability is an important component of individual wages. I estimate the parameters of the model using micro data from Mexico. The results show that the convexification was the result of changes in the prices of education due to changes in its supply. Absent the general equilibrium price effects, the changes in ability composition by education needed to produce the convexification would have been unrealistically high.

Suggested Citation

  • Chiara Binelli, 2008. "Returns to Education and Increasing Wage Inequality in Latin America," Working Paper series 30_08, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:30_08
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    Cited by:

    1. Diego Battistón & Carolina García-Domench & Leonardo Gasparini, 2014. "Could an Increase in Education Raise Income Inequality? Evidence for Latin America," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 51(1), pages 1-39, May.

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    More about this item

    Keywords

    Latin America; Wage Inequality; Education Choices; General Equilibrium filtering;
    All these keywords.

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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