Returns to Education and Increasing Wage Inequality in Latin America
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 earningsrisk 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.
Latin America, Wage Inequality, Education Choices, General Equilibrium
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