Persistent Misallocation and the Returns to Education in Mexico

Over the last two decades, Mexico has experienced macroeconomic stability, an open trade regime, and substantial progress in education. Yet average workers’ earnings have stagnated, and earnings of those with higher schooling have fallen, compressing the earnings distribution and lowering the return...

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Main Authors:	Levy, Santiago, López-Calva, Luis F.
Format:	Journal Article
Published:	Published by Oxford University Press on behalf of the World Bank 2021
Subjects:	INEQUALITY RETURNS TO EDUCATION MISALLOCATION LABOR SKILLS
Online Access:	http://hdl.handle.net/10986/36711

id	okr-10986-36711
recordtype	oai_dc
spelling	okr-10986-367112021-12-10T05:10:45Z Persistent Misallocation and the Returns to Education in Mexico Levy, Santiago López-Calva, Luis F. INEQUALITY RETURNS TO EDUCATION MISALLOCATION LABOR SKILLS Over the last two decades, Mexico has experienced macroeconomic stability, an open trade regime, and substantial progress in education. Yet average workers’ earnings have stagnated, and earnings of those with higher schooling have fallen, compressing the earnings distribution and lowering the returns to education. This paper argues that distortions that misallocate resources toward less-productive firms explain these phenomena, because these firms are less intensive in well-educated workers compared with more-productive ones. It shows that while the relative supply of workers with more years of schooling has increased, misallocation of resources toward less-productive firms has persisted. These two trends have generated a widening mismatch between the supply of, and the demand for, educated workers. The paper breaks down worker earnings into observable and unobservable firm and individual worker characteristics, and computes a counterfactual earnings distribution in the absence of misallocation. The main finding is that in the absence of misallocation average earnings would be higher, and that earnings differentials across schooling levels would widen, raising the returns to education. A no-misallocation path is constructed for the wage premium. Depending on parameter values, this path is found to be rising or constant, in contrast to the observed downward path. The paper concludes arguing that the persistence of misallocation impedes Mexico from taking full advantage of its investments in the education of its workforce. 2021-12-09T19:40:24Z 2021-12-09T19:40:24Z 2020-06 Journal Article World Bank Economic Review 1564-698X http://hdl.handle.net/10986/36711 CC BY-NC-ND 3.0 IGO http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Published by Oxford University Press on behalf of the World Bank Publications & Research Publications & Research :: Journal Article Latin America & Caribbean Mexico
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
topic	INEQUALITY RETURNS TO EDUCATION MISALLOCATION LABOR SKILLS
spellingShingle	INEQUALITY RETURNS TO EDUCATION MISALLOCATION LABOR SKILLS Levy, Santiago López-Calva, Luis F. Persistent Misallocation and the Returns to Education in Mexico
geographic_facet	Latin America & Caribbean Mexico
description	Over the last two decades, Mexico has experienced macroeconomic stability, an open trade regime, and substantial progress in education. Yet average workers’ earnings have stagnated, and earnings of those with higher schooling have fallen, compressing the earnings distribution and lowering the returns to education. This paper argues that distortions that misallocate resources toward less-productive firms explain these phenomena, because these firms are less intensive in well-educated workers compared with more-productive ones. It shows that while the relative supply of workers with more years of schooling has increased, misallocation of resources toward less-productive firms has persisted. These two trends have generated a widening mismatch between the supply of, and the demand for, educated workers. The paper breaks down worker earnings into observable and unobservable firm and individual worker characteristics, and computes a counterfactual earnings distribution in the absence of misallocation. The main finding is that in the absence of misallocation average earnings would be higher, and that earnings differentials across schooling levels would widen, raising the returns to education. A no-misallocation path is constructed for the wage premium. Depending on parameter values, this path is found to be rising or constant, in contrast to the observed downward path. The paper concludes arguing that the persistence of misallocation impedes Mexico from taking full advantage of its investments in the education of its workforce.
format	Journal Article
author	Levy, Santiago López-Calva, Luis F.
author_facet	Levy, Santiago López-Calva, Luis F.
author_sort	Levy, Santiago
title	Persistent Misallocation and the Returns to Education in Mexico
title_short	Persistent Misallocation and the Returns to Education in Mexico
title_full	Persistent Misallocation and the Returns to Education in Mexico
title_fullStr	Persistent Misallocation and the Returns to Education in Mexico
title_full_unstemmed	Persistent Misallocation and the Returns to Education in Mexico
title_sort	persistent misallocation and the returns to education in mexico
publisher	Published by Oxford University Press on behalf of the World Bank
publishDate	2021
url	http://hdl.handle.net/10986/36711
_version_	1764485749306032128

Persistent Misallocation and the Returns to Education in Mexico

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