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Returns to Education and Increasing Wage Inequality in Latin America

  • Chiara Binelli


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

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 di¤erentials was driven by a signicant 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 convexication was the result of changes in the prices of education due to changes in its supply. Absent the general equilibrium price e¤ects, the changes in ability composition by education needed to produce the convexication would have been unrealistically high.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 30-08.

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Date of creation: Jan 2008
Date of revision: Jan 2008
Handle: RePEc:rim:rimwps:30-08
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