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Education and earnings inequality in Mexico


  • Lachler, Ulrich


Education attainment levels increased dramatically for Mexico's labor force in the 1980s and early 1990s. In parallel, the country experienced a pronounced increase in earnings inequality from 1984-94, reflected in a higher dispersion of wages and an absolute decline in the real incomes of less educated, poorer Mexicans. This increased wage dispersion presents policymakers with a tradeoff between efficiency considerations (favoring increased spending on higher education) and equity considerations (favoring a more equal distribution of per student spending) in the allocation of fiscal resources to education. The author concludes that the best way to deal with this equity-efficiency tradeoff is to encourage greater private participation in higher education. His main findings are that: a) The accumulation of human capital during 1984-94, as proxied by education attainment, was accompanied by a more equal distribution of education attainment levels over that period and, thus, exerted an equalizing effect on the distribution of incomes. The increased income inequalityobserved over that period appears to be caused by an increased rate of skill-based technological change, whose transmission to Mexico and other developing countries may have been facilitated by the increased openness of their economies. b) The greater dispersion of wager observed in Mexico during the past decade raised the rates of return on investing in higher education, reversing the traditional pattern where primary education exhibits the highest rates of return. c) The social rates of return across levels of schooling were more uniform in 1994 than in 1984, suggesting a more efficient assignment of education spending. At the same time, the distribution of spending on education became more egalitarian, as per student spending in higher education declined markedly compared with per student spending at the primary level. This surprising coincidence in the pattern of spending on education was only possible because Mexico started out with a very distorted resource allocation in education that was both highly inequitable and inefficient. As Mexico's policymakers are on the way to correcting these distortions, the opportunities for avoiding the equity-efficiency tradeoff within Mexico's centralized education framework will become progressively exhausted. d) There is little reason to expect the pace of technological change, which appears mainly responsible for raising wage dispersion and the relative returns on higher education, to abate. Efficiency considerations dictate that Mexico should respond by devoting more resources to higher education. However, the federal budget, which traditionally has financed the lion's share of higher education costs in Mexico, is unable to accommodate additional spending on higher education, while spending cuts elsewhere in the education sector are bound to raise serious equity questions. Thus, to avoid falling behind in terms of human capital accumulation, greater private sector participation is necessary, at least, in terms of cost recovery from the main beneficiaries of higher education.

Suggested Citation

  • Lachler, Ulrich, 1998. "Education and earnings inequality in Mexico," Policy Research Working Paper Series 1949, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1949

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    References listed on IDEAS

    1. Behrman, Jere R & Deolalikar, Anil B, 1991. "School Repetition, Dropouts, and the Rates of Return to Schooling: The Case of Indonesia," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 53(4), pages 467-480, November.
    2. Ram, Rati, 1990. "Educational Expansion and Schooling Inequality: International Evidence and Some Implications," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 266-274, May.
    3. Chiswick, Barry R., 1997. "Interpreting the coefficient of schooling in the human capital earnings function," Policy Research Working Paper Series 1790, The World Bank.
    4. Psacharopoulos, George, 1994. "Returns to investment in education: A global update," World Development, Elsevier, vol. 22(9), pages 1325-1343, September.
    5. George E. Johnson, 1997. "Changes in Earnings Inequality: The Role of Demand Shifts," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 41-54, Spring.
    6. Psacharopoulos, George & Ying Chu Ng, 1992. "Earnings and education in Latin America : assessing priorities for schooling investments," Policy Research Working Paper Series 1056, The World Bank.
    7. Schultz, T. Paul, 1988. "Education investments and returns," Handbook of Development Economics,in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 1, chapter 13, pages 543-630 Elsevier.
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