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, comp...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2019
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/540981546873707376/Persistent-Misallocation-and-the-Returns-to-Education-in-Mexico http://hdl.handle.net/10986/31133 |
| Summary: | 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. |
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