Education and Earnings Inequality in Mexico. Policy Research Working Papers.

Educational 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 to 1994, reflected in a higher dispersion of wages and an absolute decline in the real incomes of less educated, poorer Mexicans. This situation 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. This analysis concludes that the accumulation of human capital, as proxied by educational attainment, does not appear to be among the factors responsible for Mexico's disappointing growth performance since the early 1980s. The most persuasive hypothesis explaining this increased earnings inequality is that it is caused by an increased rate of skill-biased technological change, the transmission of which to developing countries may have been facilitated by the increased openness of those economies. The increased earning inequality is associated with a higher dispersion of the average wages received by workers with different schooling attainment. This raised the private rates of return to higher levels of education, in effect reversing the traditional pattern of rates of return, where the highest rates are reported for the primary level. The social rates of return also show this reversal in the relative magnitude of rates of return. The solution the paper recommends is for the government progressively to pass on a greater share of the costs of higher education to its direct beneficiaries, while facilitating the private absorption of those costs through student loan programs designed to correct market failures in the financial sector. An annex contains technical notes on calculating the rate of return. (Contains 3 figures, 12 tables and 24 references.) (SLD)