IDEAS home Printed from https://ideas.repec.org/p/rim/rimwps/30_08.html
   My bibliography  Save this paper

Returns to Education and Increasing Wage Inequality in Latin America

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.rcea.org/RePEc/pdf/wp30_08.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Gonzaga, Gustavo & Menezes Filho, Naercio & Terra, Cristina, 2006. "Trade liberalization and the evolution of skill earnings differentials in Brazil," Journal of International Economics, Elsevier, vol. 68(2), pages 345-367, March.
    2. repec:idb:brikps:9171 is not listed on IDEAS
    3. Eric A. Verhoogen, 2008. "Trade, Quality Upgrading, and Wage Inequality in the Mexican Manufacturing Sector," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(2), pages 489-530.
    4. Ravallion, Martin, 1997. "Can high-inequality developing countries escape absolute poverty?," Economics Letters, Elsevier, vol. 56(1), pages 51-57, September.
    5. Lawrence F. Katz & Kevin M. Murphy, 1992. "Changes in Relative Wages, 1963–1987: Supply and Demand Factors," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(1), pages 35-78.
    6. Lee, Donghoon & Wolpin, Kenneth I., 2010. "Accounting for wage and employment changes in the US from 1968-2000: A dynamic model of labor market equilibrium," Journal of Econometrics, Elsevier, vol. 156(1), pages 68-85, May.
    7. L. ALAN WINTERS & NEIL McCULLOCH & ANDREW McKAY, 2015. "Trade Liberalization and Poverty: The Evidence So Far," World Scientific Book Chapters, in: Non-Tariff Barriers, Regionalism and Poverty Essays in Applied International Trade Analysis, chapter 14, pages 271-314, World Scientific Publishing Co. Pte. Ltd..
    8. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-1248, September.
    9. Matthew Johnson & Michael P. Keane, 2013. "A Dynamic Equilibrium Model of the US Wage Structure, 1968-1996," Journal of Labor Economics, University of Chicago Press, vol. 31(1), pages 1-49.
    10. Davis, Donald, 1996. "Trade Liberalization And Income Distribution," Harvard Institute for International Development (HIID) Papers 294371, Harvard University, Kennedy School of Government.
    11. Thomas Lemieux, 2006. "Postsecondary Education and Increasing Wage Inequality," American Economic Review, American Economic Association, vol. 96(2), pages 195-199, May.
    12. Oriana Bandiera & Gerard Caprio & Patrick Honohan & Fabio Schiantarelli, 2000. "Does Financial Reform Raise or Reduce Saving?," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 239-263, May.
    13. Hanan G. Jacoby & Emmanuel Skoufias, 1997. "Risk, Financial Markets, and Human Capital in a Developing Country," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(3), pages 311-335.
    14. Abhijit Banerjee & Thomas Piketty, 2005. "Top Indian Incomes, 1922-2000," The World Bank Economic Review, World Bank, vol. 19(1), pages 1-20.
    15. Pavcnik, Nina & Blom, Andreas & Goldberg, Pinelopi & Schady, Norbert, 2003. "Trade liberalization and labor market adjustment in Brazil," Policy Research Working Paper Series 2982, The World Bank.
    16. Donghoon Lee, 2005. "An Estimable Dynamic General Equilibrium Model Of Work, Schooling, And Occupational Choice," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(1), pages 1-34, February.
    17. Thomas Piketty & Emmanuel Saez, 2003. "Income Inequality in the United States, 1913–1998," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 1-41.
    18. Amy Y. C. Liu, 2006. "Changing wage structure and education in Vietnam, 1992–98," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(4), pages 681-706, October.
    19. George Psacharopoulos & Harry Anthony Patrinos, 2004. "Returns to investment in education: a further update," Education Economics, Taylor & Francis Journals, vol. 12(2), pages 111-134.
    20. Christian Belzil & Jörgen Hansen, 2001. "Heterogeneous Returns to Human Capital and Dynamic Self-Selection," CIRANO Working Papers 2001s-10, CIRANO.
    21. Harrison, Ann, 1996. "Openness and growth: A time-series, cross-country analysis for developing countries," Journal of Development Economics, Elsevier, vol. 48(2), pages 419-447, March.
    22. Dilip Mookherjee & Debraj Ray, 2003. "Persistent Inequality," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 369-393.
    23. Gianluca Violante & Giovanni Gallipoli & Costas Meghir, 2005. "Education Decisions, Equilibrium Policies and Wages Dispersion," 2005 Meeting Papers 522, Society for Economic Dynamics.
    24. Thomas Piketty, 2005. "Top Income Shares in the Long Run: An Overview," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 382-392, 04/05.
    25. William Maloney & Jairo Mendez, 2004. "Measuring the Impact of Minimum Wages. Evidence from Latin America," NBER Chapters, in: Law and Employment: Lessons from Latin America and the Caribbean, pages 109-130, National Bureau of Economic Research, Inc.
    26. Revenga, Ana, 1997. "Employment and Wage Effects of Trade Liberalization: The Case of Mexican Manufacturing," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 20-43, July.
    27. Juan Luis Londoño & Miguel Székely, 2000. "Persistent Poverty and Excess Inequality: Latin America, 1970–1995," Journal of Applied Economics, Taylor & Francis Journals, vol. 3(1), pages 93-134, May.
    28. Feenstra, Robert C. & Hanson, Gordon H., 1997. "Foreign direct investment and relative wages: Evidence from Mexico's maquiladoras," Journal of International Economics, Elsevier, vol. 42(3-4), pages 371-393, May.
    29. Donald R. Davis, 1996. "Trade Liberalization and Income Distribution," Harvard Institute of Economic Research Working Papers 1769, Harvard - Institute of Economic Research.
    30. Ferreira, Francisco H. G. & Leite, Phillippe G. & Wai-Poi, Matthew, 2007. "Trade liberalization, employment flows, and wage inequality in Brazil," Policy Research Working Paper Series 4108, The World Bank.
    31. Per Krusell & Lee E. Ohanian & JosÈ-Victor RÌos-Rull & Giovanni L. Violante, 2000. "Capital-Skill Complementarity and Inequality: A Macroeconomic Analysis," Econometrica, Econometric Society, vol. 68(5), pages 1029-1054, September.
    32. James M. Poterba & Daniel R. Feenberg, 2000. "The Income and Tax Share of Very High-Income Households, 1960-1995," American Economic Review, American Economic Association, vol. 90(2), pages 264-270, May.
    33. James Heckman & Lance Lochner & Christopher Taber, 1998. "Explaining Rising Wage Inequality: Explanations With A Dynamic General Equilibrium Model of Labor Earnings With Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 1-58, January.
    34. Thomas Lemieux, 2008. "The changing nature of wage inequality," Journal of Population Economics, Springer;European Society for Population Economics, vol. 21(1), pages 21-48, January.
    35. Gordon H. Hanson & Ann Harrison, 2022. "Trade Liberalization And Wage Inequality In Mexico," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 3, pages 43-60, World Scientific Publishing Co. Pte. Ltd..
    36. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2005. "Two Views of Inequality Over the Life Cycle," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 765-775, 04/05.
    37. Arrau, Patricio & van Wijnbergen, Sweder, 1991. "Intertemporal substitution, risk aversion, and private savings in Mexico," Policy Research Working Paper Series 682, The World Bank.
    38. Owen, Ann L. & Weil, David N., 1998. "Intergenerational earnings mobility, inequality and growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 71-104, February.
    39. Attanasio, Orazio P. & Szekely, Miguel, 2004. "Wage shocks and consumption variability in Mexico during the 1990s," Journal of Development Economics, Elsevier, vol. 73(1), pages 1-25, February.
    40. 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.
    41. Antonio Avalos & Andreas Savvides, 2006. "The Manufacturing Wage Inequality in Latin America and East Asia: Openness, Technology Transfer, and Labor Supply," Review of Development Economics, Wiley Blackwell, vol. 10(4), pages 553-576, November.
    42. Pinelopi K. Goldberg & Nina Pavcnik, 2004. "Trade, Inequality, and Poverty: What Do We Know? Evidence from Recent Trade Liberalization Episodes in Developing Countries," NBER Working Papers 10593, National Bureau of Economic Research, Inc.
    43. Juan Luis Londoño & Miguel Székely, 2000. "Persistent Poverty and Excess Inequality: Latin America, 1970-1995," Journal of Applied Economics, Universidad del CEMA, vol. 3, pages 93-134, May.
    44. Menezes Filho, N. A. & Giovannetti, Bruno, 2006. "Trade Liberalization and Demand for Skill in Brazil," Insper Working Papers wpe_57, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    45. Naercio Menezes Filho & Naercio Menezes Filho, 2006. "Trade Liberalization and the Demand for Skilled Labor in Brazil," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2006), pages 1-28, August.
    46. Donghoon Lee & Kenneth I. Wolpin, 2006. "Intersectoral Labor Mobility and the Growth of the Service Sector," Econometrica, Econometric Society, vol. 74(1), pages 1-46, January.
    47. Cragg, Michael Ian & Epelbaum, Mario, 1996. "Why has wage dispersion grown in Mexico? Is it the incidence of reforms or the growing demand for skills?," Journal of Development Economics, Elsevier, vol. 51(1), pages 99-116, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Binelli Chiara, 2015. "How the wage-education profile got more convex: evidence from Mexico," The B.E. Journal of Macroeconomics, De Gruyter, vol. 15(2), pages 509-560, July.
    2. Paolo Giordano & Kun Li, 2012. "An Updated Assessment of the Trade and Poverty Nexus in Latin America," IDB Publications (Working Papers) 79119, Inter-American Development Bank.
    3. Jorge Saba Arbache, 2001. "Trade Liberalisation and Labor Markets in Developing Countries: Theory and Evidence," Studies in Economics 0112, School of Economics, University of Kent.
    4. Manuel Fernández & Gabriela Serrano, 2022. "New Perspectives on Inequality in Latin America," Documentos CEDE 20295, Universidad de los Andes, Facultad de Economía, CEDE.
    5. Atolia, Manoj & Kurokawa, Yoshinori, 2016. "The impact of trade margins on the skill premium: Evidence from Mexico," Journal of Policy Modeling, Elsevier, vol. 38(5), pages 895-915.
    6. Zouhair Mrabet, 2012. "The Impact of Trade Liberalization on Labor Market of Developing Countries: What can Literature tell us?," Journal of Economics and Behavioral Studies, AMH International, vol. 4(6), pages 307-318.
    7. Keane, Michael P. & Roemer, John E., 2009. "Assessing policies to equalize opportunity using an equilibrium model of educational and occupational choices," Journal of Public Economics, Elsevier, vol. 93(7-8), pages 879-898, August.
    8. Pinelopi K. Goldberg & Nina Pavcnik, 2004. "Trade, Inequality, and Poverty: What Do We Know? Evidence from Recent Trade Liberalization Episodes in Developing Countries," NBER Working Papers 10593, National Bureau of Economic Research, Inc.
    9. Bhalotra, Sonia & Fernandez Sierra, Manuel, 2018. "The distribution of the gender wage gap," ISER Working Paper Series 2018-10, Institute for Social and Economic Research.
    10. Yoshimichi Murakami, 2018. "Globalization and Income Inequality in Latin America: A Review of Theoretical Developments and Recent Evidence," Discussion Paper Series DP2018-16, Research Institute for Economics & Business Administration, Kobe University, revised Aug 2018.
    11. Pinelopi Koujianou Goldberg & Nina Pavcnik, 2007. "Distributional Effects of Globalization in Developing Countries," Journal of Economic Literature, American Economic Association, vol. 45(1), pages 39-82, March.
    12. Mehta, Aashish & Mohr, Belinda Acuña, 2012. "Economic Liberalization and Rising College Premiums in Mexico: A Reinterpretation," World Development, Elsevier, vol. 40(9), pages 1908-1920.
    13. Bhalotra, Sonia R & Fernández, Manuel & Wang, Fan, 2022. "The distribution of the gender wage gap : An equilibrium model," CAGE Online Working Paper Series 614, Competitive Advantage in the Global Economy (CAGE).
    14. Julien Gourdon, 2011. "Wage inequality in developing countries: South–South trade matters," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 58(4), pages 359-383, December.
    15. Chiquiar, Daniel, 2008. "Globalization, regional wage differentials and the Stolper-Samuelson Theorem: Evidence from Mexico," Journal of International Economics, Elsevier, vol. 74(1), pages 70-93, January.
    16. Paolo Epifani & Gino Gancia, 2008. "The Skill Bias of World Trade," Economic Journal, Royal Economic Society, vol. 118(530), pages 927-960, July.
    17. García Muñoz, Teresa María & Milgram Baleix, Juliette & Odeh, Omar Odeh, 2020. "Inequality in Latin America: The role of the nature of trade and partners," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 14, pages 1-35.
    18. Yoshinori Kurokawa, 2014. "A Survey Of Trade And Wage Inequality: Anomalies, Resolutions And New Trends," Journal of Economic Surveys, Wiley Blackwell, vol. 28(1), pages 169-193, February.
    19. Eddy LEE & Marco VIVARELLI, 2006. "The social impact of globalization in the developing countries," International Labour Review, International Labour Organization, vol. 145(3), pages 167-184, September.
    20. Thierry Verdier, 2005. "Intégration commerciale « socialement responsable » : une approche en termes d'économie politique," Revue d’économie du développement, De Boeck Université, vol. 13(4), pages 55-121.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rim:rimwps:30_08. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Marco Savioli (email available below). General contact details of provider: https://edirc.repec.org/data/rcfeait.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.