墨西哥教育与收入的不平等

w_ s 1L f+q POLICY RESEARCH WORKING PAPER 1949 Education and Earnings Mexicos government should progressively shift more of the Inequality in Mexico costs of higher education to its direct beneficiaries, Ulrich Ldchler facilitating the private absorption of those costs through student loan programs designed to correct market failures in the financial sector. The World Bank Mexico Country Department H July 1998  | POLICY RESEARCH WORKING PAPER 1949 Summary findings Education attainment levels increased dramatically for * The social rates of return across levels ol schooling Mexico's labor force in the 1980s and early 1990s. In were more uniform in 1994 than in 1984, suggesting a parallel, the country experienced a pronounced increase more efficient assignment of education spending. At the in earnings inequality from 1984-94, reflected in a same time, the distribution of spending on education higher dispersion of wages and an absolute decline in the became more egalitarian, as per student spending in real incomes of less educated, poorer Mexicans. This higher education declined markedly compared with per increased wage dispersion presents policymakers with a student spending at the primary level. This surprising tradeoff between efficiency considerations (favoring coincidence in the pattern of spending on education was increased spending on higher education) and equity only possible because Mexico started out with a very considerations (favoring a more equal distribution of per distorted resource allocation in education that was both student spending) in the allocation of fiscal resources to highly inequitable and inefficient. As Mexico's education. policymakers are on the way to correcting these Lachler concludes that the best way to deal with this distortions, the opportunities for avoiding the equity- equity-efficiency tradeoff is to encourage greater private efficiency tradeoff within Mexico's centralized education participation in higher education. His main findings are framework will become progressively exhausted. that: * There is little reason to expect the pace of * The accumulation of human capital during 1984- technological change, which appears mainly responsible 94, as proxied by education attainment, was for raising wage dispersion and the relative returns on accompanied by a more equal distribution of education higher education, to abate. Efficiency considerations attainment levels over that period and, thus, exerted an dictate that Mexico should respond by devoting more equalizing effect on the distribution of incomes. The resources to higher education. However, the federal increased income inequality observed over that period budget, which traditionally has financed the lion's share appears to be caused by an increased rate of skill-based of higher education costs in Mexico, is unable to technological change, whose transmission to Mexico and accommodate additional spending on higher education, other developing countries may have been facilitated by while spending cuts elsewhere in the education sector are the increased openness of their economies. bound to raise serious equity questions. Thus, to avoid The greater dispersion of wages observed in Mexico falling behind in terms of human capital accumulation, during the past decade raised the rates of return on greater private sector participation is necessary, at least investing in higher education, reversing the traditional in terms of cost recovery from the main beneficiaries of pattern where primary education exhibits the highest higher education. rates of return. This paper - a product of the Mexico Country Department - emerged from research in the preparation of the 1998 Country Economic Memorandum and is part of the department's larger effort to engage in a fruitful economic policy dialogue with Mexican policymakers. Copies of the paper are available free from the World Bank, 1818 H Street NAWT, Washington, DC 20433. Please contact Carmen Lazcano, room 14-135, telephone 202-473-7776, fax 202-522-2113, Internet address clazcano@worldbank.org. The author may be contacted at ulachler(worldbank.org. July 1998. (27 pages) The Policy Research W'orking Paper Series diysemiates the findings of work isn progress to encourage the exchaege of ideas about I development issues. An objective of the series is to get the findings out q,uickly, even if the presqentationis are less thanl fulfly polisbed. Th2e papers carry the names of the authors aiid shouild be cited accordiiigly. The fipidinzgs, interpretations, and coniclusionis expressed ;1V this paper are entirely those of the authors. They do not necessarily represent the vieuw of the WGorld Bankz, its Executive Directors, or- the countries they represent. Produced by the Policy Researclh Dissemination Ceniter  EDUCATION AND EARNINGS INEQUALITY IN MEXICO Ulrich Lachler* * Principal Economist, Mexico Country Department, World Bank. This paper was prepared with research assistance from Gladys Lopez Acevedo, who processed the ENIGH data discussed therein. Many helpful comments were received from Barry Bosworth, Nancy Gillespie, George Psacharopoulos, Rosa- Maria Rubalcava, Fernando Cortes, Enrique Hernandez Laos, and Eduardo Velez.  EDUCATION AND EARNINGS INEQUALITY IN MEXICO The education attainment of Mexico's labor force increased dramatically during the 1980s and early 1990s, contrasting markedly with the uneven accumulation of physical capital. At the same time, the rates of return on investments in different levels of schooling show significantly less dispersion than they did a decade ago. This suggests that investment in education has been taking place in a more socially efficient manner. Another visible development over the last decade, however, has been a significant increase in earnings inequality, accompanied by an absolute decline in the real incomes of the less educated, poorer members of society. This comes as something of a surprise in light of the great equalizing properties generally attributed to education, but is a phenomenon that in recent years also has been observed in other developing as well as developed countries. The increased wage dispersion presents policymakers with two challenges: the more immediate one is how to respond to the decline in real incomes facing a large share of the country's population. The other related challenge, with implications for the country's long-term growth prospects, concerns a tradeoff in the allocation of resources in education and is especially acute in relatively centralized education system such as Mexico's. Since the increased wage dispersion raises the rate of return from investing in higher education, economic efficiency considerations would dictate a response that devotes relatively more resources to higher education versus other levels. A resource reallocation to that effect, however, means transferring resources toward segments of the population that are already better off, thus conflicting with equity considerations. Mexico's policymakers were able to avoid this policy dilemma over the last decade: as shown below, the allocation of public spending on education has become somewhat more egalitarian and, at the same time, the social rates of return associated with different levels of education have become more uniform. This happy coincidence was possible only because Mexico started out with a very distorted resource allocation in education. As past resource misallocations are corrected, however, the opportunities for further improvements in resource allocation within the existing, centralized education framework are progressively exhausted. This is likely to result in increasing tensions in the allocation of fiscal resources -- between efficiency considerations that argue for more resources to higher education and egalitarian considerations that argue for a more equal distribution of transfers within and outside the education sector. This paper argues that the most promising way of dealing with these tensions is by seeking to clarify the roles for the public and private sectors in education and by encouraging greater private participation in higher education.  2 A. The Growth of Education Attainment1 Education attainment levels increased rapidly in most developing countries since the 1950s; Schultz (1988). While Mexico also partook in that development, earlier studies had identified a significant lag in its education indicators. Londonto (1996), for example, points to an "education deficit", according to which the Latin American countries in general, and Mexico in particular, have approximately two years less of education than would be expected for their level of development (as measured by per-capita incomes). Elias (1992) finds that education was the most important source of labor quality improvement in Latin America between 1950 and 1970, but points out that such improvements did not take place to the same extent in Mexico. This changed dramatically in the 1980s, as shown in the scatter diagram below. Figure 1 describes the relation between income per capita and average years of schooling of the population aged 15 years or more, using stacked cross-country data for the years 1960, 1970, 1980, 1985 and 1990.2 Mexico's level of education 'The following discussion primarily focuses on the evolution of education attainment levels as measured by years of schooling, on the assumption that the quality of education has remained more or less constant. Although it is of great interest in this context, information on the quality of education in Mexico is very scarce. The most common measures of "quality" are based on input measures, (e.g., real expenditures on education per student, student-teacher ratios, or class-density variables) or secondary performance variables (e.g., evolution of repetition and desertion rates). On the basis of these measures, Mexico also has performed comparatively well over the last few decades. These measures are not very satisfactory, however, as they reflect many other influences in addition to the quality of instruction as reflected in the acquisition of knowledge and skills. A comprehensive education survey was conducted in Mexico in 1995 as part of the Third International Mathematics and Science Study (TIMMS) that may have yielded important data to permit correlating the preceding education sector characteristics with academic achievement levels to obtain a better understanding of the determinants of education quality in Mexico. That data set has not been made publicly available. 2 The scatter diagram in Figure 1 is based on 317 observations from five different years. The observations pertaining to Mexico, ordered by date, are as follows: Ave. Schooling (years) Ln (GDP per capita; 1980 US$) 1960 2.76 7.95 1970 3.68 8.29 1980 4.77 8.71 1985 5.20 8.63 1990 6.72 8.67 The trend line represents the least square regression line given by: S = -13.17 + 2.28 Ln(GDPcap) Adj. R2 = 0.68 (-18.7) (26.0) t-values in parentheses The application of Ramsey's RESET test to this regression equation failed to detect a specification error; unlike with the alternative specification of type: S = a + bX + cX2. However, coefficient stability tests indicated that the trend line is not constant across decades. This is reflected in the upward drift of the coefficients associated with the dummies in the following equation: S = -13.20 + 2.21 Ln(GDPcap) + 0.023DUM70 + 0.525DUM80 + 0.833DUM 85 + 0.997DUM90 (-19.0) (25.4) (0.1) (1.7) (3.0) (3.6) Adj. R2 = 0.70, t-values in parentheses  Figure 1 Cross-Country Relation between Education Attainment and GDP 12 - 10 :*.+# . Mexico 1990 8 6 4 o 0 5.00 S.S0 6.00 6.50 7.00 7.50 8.00 8.50 9.00 9.50 10.00 Ln (GDP per capita) Source: Penn World Tables, mark 5.6, and Barro-Lee data set on international measures of schooling. The chart is based on stacked cross-country data for 1960, 1970, 1980, 1985 and 1990. Country coverage varies according to data availability. U.1-achler  4 attainment in 1960 was significantly below the world mean for countries at similar levels of economic development. Although Mexico's education attainment increased steadily over the following two decades, it continued to remain below the international trend line. In the 1980s, however, the growth of education attainment in Mexico accelerated, permitting it to catch up to international standards by 1990; where its placement in Figure 1 is slightly above the trend line. The closure of Mexico's education gap vis-a-vis the rest of the world was hastened in part by the country's economic stagnation. Mexico's real GDP per capita in the mid-1990s was roughly the same as it had been in the first half of the 1980s. Had Mexico continued to grow at the same pace as in the 1960s and 1970s (and assuming that the gains in education attainment remain the same), its 1990 placement in Figure I would have continued to remain below the cross-country trend line, though at a much reduced distance compared to previous years.3 The preceding observation, however, should not detract from the remarkable increase in schooling that occurred during the 1980s. While average schooling level in Mexico increased by roughly one year per decade during 1960-1980 (from 2.76 to 4.77 years), it increased by two years in the decade between 1980-1990. As described in Psacharopoulos et al (1996), this rapid improvement reflects the great efforts made in Mexico to increase both the quality of and access to public education since 1950. A consequence of these developments is that the share of workers with less than primary education decreased from almost half of the labor force in 1984 to 36 percent in 1994, while the share of workers with at least a completed secondary education increased from 26 to 39 percent; Table 1. The rapid growth of education attainment in Mexico also stands out in recent cross-country growth studies (e.g., Bosworth, 1997), which decompose per capita growth into the contributions from several factors, including education attainment as a proxy for human capital accumulation, in a growth accounting framework. These studies reveal a major break in Mexico's growth performance after 1982. A similar break is visible in the accumulation of physical capital and in total factor productivity growth, but not in the accumulation of schooling, which performed well by world standards. 3 Mexico's education deficit -- i.e., the vertical difference from the world trend line in Figure 1 -- has declined significantly since 1960, with the main catch-up occurring in 1980-90. This is clearly visible from Figure 1, but also appears under less restrictive specifications of the estimated trend line. The differences from the trendline are stated below, beginning with the most restrictive specification: Equation Specification 1960 1970 1980 1985 1990 Std. Error of (difference from world mean in years) Regression Stacked, without dummies -2.22 -2.09 -1.95 -1.36 +0.08 1.52 Stacked with dummy variables -1.62 -1.49 -1.82 -1.54 -0.26 1.48 Individual equations for each year -1.55 -1.41 -1.84 -1.59 -0.26 na  5 B. Changes in Earnings Inequality At the same time as this remarkable advance in education attainment was taking place, the distribution of income in Mexico worsened notably; see e.g., De la Torre (1997), Panuco-Laguette and Szekely (1996). For example, the Gini coefficient of Mexico's total income distribution increased from 0.43 in 1984 to 0.48 in 1994. This deterioration took place before the 1995 recession and, thus, cannot be attributed to business cycle effects. Instead, the increase in overall income inequality appears to be closely related to an increase in the dispersion of wages and salaries across different schooling levels. Table 1 describes the change in real wages between 1984 and 1994, using two concepts of remuneration (described in Section D.) Table 1: Real Wage Rates in Mexico (Unless stated otherwise, all figures refer to hourly rates expressed in constant 1994 Pesos) Wages & Salaries Monetary Income Share of Workers Schooling Level 1984 1994 difference 1984 1994 difference 1984 1994 0 - less than primary 3.17 3.08 -2.8% 4.83 4.12 -14.7% 48.1% 35.7% 1 - primary complete 5.23 4.42 -15.5% 7.90 5.39 -31.8% 26.3% 25.4% 2 - secondary complete 6.55 5.83 -11.0% 7.55 6.90 -8.6% 13.3% 21.3% 3 - preparatory complete 9.62 11.68 21.4% 10.64 12.84 20.7% 7.8% 11.1% 4 - university and above 14.93 21.96 47.1% 16.94 25.55 50.8% 4.5% 6.6% weighted average 5.62 6.88 22.4% 7.00 7.57 8.1% Source: Own calculations based on ENIGH84 and ENIGH94. All figures are weighted averages using expansion factors to reflect national representation. Even though the average wage increased during the decade spanned by Table 1, most workers experienced a significant decline in their wages. This disparity in the evolution of real wages is most visible in Figure 2, which shows that 83 percent of the working population experienced a decline in real wages during the last decade. Figure 2 MEXICO Percentage Change in Real Wages by Percentile: 1984-1994 40.00% 30.00%0 20.00% ~~based on .6 a , 10.00% 0.00% e -10.00% 10 15 20 25 30 3 40 45 50 55 606570 85 90 95 CL -20.00% .-30.00% ~-ory monetary incomes -40.00% Percentiles Source: ENIGH84 and ENIGH94.  6 The deterioration of real wages was partly compensated for through increases in hours worked, suggesting backward bending labor supply curves at low income levels. This was not enough, however, to prevent an erosion of overall income for the majority of workers; Table 2. Table 2: Average Hours Worked and Income Received Schooling Level Wage Earners Monetary Income Recipients Avg. Hours per Week 1984 1994 change 1984 1994 change 0 - less than primary 44.8 50.7 13.3% 43.0 46.8 8.8% 1 - primary complete 45.1 49.0 8.6% 44.7 48.2 7.9% 2 - secondary complete 44.4 46.8 5.6% 44.5 46.8 5.2% 3 - preparatory complete 38.7 43.7 12.8% 38.9 44.1 13.4% 4 - university and above 41.6 44.7 7.5% 42.2 44.7 5.9% weighted average 44.1 47.8 8.5% 43.3 46.7 7.8% Avg. Annual Income 1984 1994 change 1984 1994 change (in 1994 Pesos) 0 - less than primary 7,530 7,674 1.9% 9,514 8,308 -12.7% 1 - primary complete 12,705 11,316 -10.9% 15,888 13,222 -16.8% 2 - secondary complete 15,343 14,097 -8.1% 16,995 15,978 -6.0% 3 - preparatory complete 18,643 25,709 37.9% 19,483 27,898 43.2% 4 - university and above 33,899 55,428 63.5% 38,741 62,769 62.0% weighted average 13,057 16,658 27.6% 14,268 16,931 18.7% Source: Own calculations based on ENIGH84 and ENIGH94. All figures are weighted averages using expansion factors to achieve representation at the national level. One explanation for a deteriorating income distribution that is closely connected to the advance in education attainment has been made by Ram (1 990). Education is generally considered to have an equalizing effect on incomes, which would indicate a positive relation between measures of income inequality and of education inequality. However, the dispersion of schooling attainment and the mean level of schooling need not be positively related in a monotonic manner. Upon exploring this relationship by way of a cross-country analysis, Ram finds a curvilinear (Kuznets-type inverted-U) relation between the mean level of schooling and schooling inequality in the labor force.4 That is, as schooling expands, education inequality first increases, but then starts declining after reaching a peak. That turning point occurs when mean schooling is 4The theoretical rationale underlying this fmding is reminiscent of the "Laffer curve" in public finance theory. It stated that tax revenues are 0 when tax rates are 0 and will again become 0 when the tax rate approaches 100% (as that would eliminate all incentive to work.) Since revenues are positive at tax rates between 0% and 100%, the revenue-rate relationship must broadly approximate an inverted-U. In the case of education, the "theory" states that when no one in society is educated, the distribution of education is perfectly equal, as it would be when everyone in society has a Ph.D. (considered for simplicity to be the maximal level of education attainment). In the process of going from a Zero- education society to the Land of Ph.D.s, the distribution of education must perforce become more unequal before it ultimately improves again.  7 about 6.8 years for the full sample of countries, and 6.3 years for the sub-sample of less developed countries. So, if Mexican schooling levels had been below the turning point, it is conceivable that the rapid increase of education attainment in the 1980s may have contributed to greater earnings inequality via an increased inequality of schooling attainment. The evidence does not support this explanation for the increased earnings inequality in Mexico: using Ram's (1990) method of calculation based on 5 schooling levels, the mean level of schooling in Mexico was 6.45 years in 1984 and 7.65 years in 1994. This means that Mexico started in 1984 with a mean level of schooling that was slightly above the "turning point" according to the LDC subsample and slightly below the turning point for the full sample of countries, while it ended up in 1994 with a mean schooling level substantially above the turning point. If the curvilinear relation is evenly distributed around the turning point, we should clearly expect the inequality of schooling in Mexico to have declined over that decade. This conclusion is confirmed by decomposing the change of the Gini Index between 1984 and 1994 into the proportion that is attributable to changes in the wage rate, in hours worked and in education attainment. Table 3 presents the results of such an exercise, both for the distribution of Wage and Salary incomes, as well as the broader Monetary income concept. For each income concept, several "synthetic" Gini indexes are calculated:5 the first two, Gini-1984 and Gini-1994, are based on the distribution of wage rates, hours worked and education attainment that pertain in each year. The next three indexes are derived by recalculating the 1984 Gini index after successively replacing the 1984 distribution of wage rates, hours worked and schooling attainment by its 1994 counterpart. The second column under each income concept reports the value of each Gini index calculated in this manner, while the third column reports the percentage difference of these values relative to the original 1984 Gini index. Table 3: Sources of Increased Earnings Inequality Wages & Salaries Monetary Income Level %change over Level %change over Gini-84 Gini-84 Gini 1984 0.2281 0.0 Gini 1984 0.1712 0.0 Gini 1994 0.3034 33.0 Gini 1994 0.2812 64.3 Gini-Awage 0.2962 29.9 Gini-Awage 0.2543 48.5 Gini-Ahours 0.2208 -3.2 Gini-Ahours 0.1696 -0.9 Gini-Aeducation 0.2222 -2.6 Gini-Aeducation 0.1710 -0.1 Source: Own calculations based on data from Tables I and 2. Note: the %-changes in the lower half of each column do not add up to the %-difference between Gini-94 and Gini-84 due to large rounding errors. Table 3 indicates that the "synthetic" Gini index increased by 33 percent between 1984 and 1994 (under the Wage and Salary income concept) and that over 90 5 These "synthetic" Gini indexes are constructed under the assumption that all the individuals with a given schooling level earn the same wage rate and work the same number of hours as the averages shown for each schooling level in Table 2.  8 percent (29.9 . 33.0) of that increase in earnings inequality is attributable to the change in the distribution of wage rates over that decade. (Using the broader Monetary income concept, around 75 percent of the increase in earnings inequality is explained by the change in wage rates.) On the other hand, changes in the distribution of education attainment are shown in both cases to have contributed to a reduction in earnings inequality, though by modest amounts; -2.6 and -0.1 percent. Changes in hours worked also contributed modestly toward reducing income inequality. In light of this evidence, we can safely rule out increased schooling inequality as an explanation of the increased income inequality that took place in Mexico over the last decade. Three broad hypotheses that do not hinge on changes in the distribution of education attainment are frequently advanced to explain the similar increases in earnings inequality experienced in Mexico and other countries.6 These link the increase of earnings inequality to (i) the increased openness of the economy, (ii) institutional changes in the labor market, and (iii) skill-biased technological change. The first of these hypotheses argues that as trade barriers are reduced, an economy is placed under increased competitive pressures to specialize along its lines of comparative advantage. A developed country that is relatively high skill-abundant, like the United States, will be induced to specialize in high skill- or education-intensive activities as its low-skill industries come under increased competitive pressure from low skill-abundant, low-wage countries. This explanation has several problems when applied to the United States, and becomes even less persuasive when applied to Mexico. Mexico greatly liberalized its trade regime since 1984. However, the reduction of its trade barriers has mostly been vis- a-vis imports from the developed countries, notably the United States and Canada, whose share in total Mexican merchandise imports increased from 68 percent in 1985 to 73 percent in 1993 (and to 77.5 percent in 1996). Since Mexico is a low skill-abundant country compared to its two northern neighbors, it would be expected that the liberalization of trade Would have induced a specialization pattern that would raise the relative demand (and hence wages) for the lesser educated members of the labor force. This did not happen. Instead, the increase in earnings inequality observed in Mexico is identical to that observed in the United States: less educated workers experienced real wage declines, while highly educated workers experienced real wage improvements. 7 6 See, for example, the Symposium on Wage Inequality published in Journal of Economic Perspectives (1997) and the Symposium on "How International Exchange, Technology and Institutions Affect Workers" published in The World Bank Economic Review (1997). 7 The trade-based explanation may still be relevant to the extent that greater openness facilitates the transfer of ideas and technology, which is identified below as the more persuasive explanation of the increase in earnings inequality. A variant on the globalization/technology nexus explanation, advanced by Feenstra and Hanson (1994), involves outsourcing behavior where multinational enterprises in the developed country relocate their lower skill-intensive activities to the less skill-abundant developed countries. However, what is a low skill activity in the United States may be a high-skill activity in Mexico, which could explain the identical evolution of earnings inequality in both countries.  9 The second explanation revolves around institutional changes such as reductions in the minimum wage, the decreasing strength of trade unions and the declining share of state-owned enterprises. The existence of a binding minimum wage, for example, truncates the lower end of the wage distribution. As the minimum wage is allowed to erode away, say through inflation, it becomes less binding by moving further down the low end of the wage distribution, with the result that, ceteris paribus, a higher share of wages will lie below the previous minimum wage level. That translates into an increased dispersion in wages and earnings. Similarly, strong trade unions have often been found to exert an egalitarian effect on the wage distribution, while at the same time commanding a wage premium for union members. Any waning of union strength, as happened in the United States over the last two decades, therefore would contribute to an increase in wage dispersion. A review of institutional developments in the Mexican labor market by Hemrndez et al (1998) showed that these factors may have contributed to a higher wage dispersion. Most important in this regard was the apparent decline in union strength, in part due to the privatization of public enterprises during the early 1990s. That review also showed that the real decline of minimum wages since the early 1980s may have had an impact as well, but mainly confined to wages in the primary sector. Perhaps the most persuasive explanation, both for the United States and Mexico, is that which links earnings inequality to skill-biased technological changes that raise the relative demand for higher-skilled labor. According to the typology used by Johnson (1997), the type of technological change that drives up the wages of more highly skilled workers and drives down those of less skilled workers -- as occurred in both the United States and Mexico -- is extensive skill-biased technological change. Under this type of technological change, skilled workers become more efficient in jobs that were traditionally performed by unskilled workers. A demand/supply analysis in Hernandez et al (1998) provides support for this explanation in the case of Mexico: it showed that secular changes in demand for workers differentiated by education level were the dominant force behind recent adjustments in the Mexican labor market, with the market for more educated workers dominated by intra-sectoral increases in demand, and for less educated workers by intra-sectoral decreases in demand, independent of gender and experience. That outcome suggests that the rise in wage dispersion originates from changes in the intra-sectoral production structure, which favors educated versus uneducated workers, rather than from changing trade patterns, which would affect the demand for labor differently across sectors.8 C. Some Background Facts on Education Spending Mexico's overall spending on education, as a share of GDP, is slightly above the OECD average and compares favorably with education spending levels in other developing countries. Total spending per student in Mexico increased steeply in the second half of the 1980s and early 1990s, even though the total student population increased, from 24 million in 1985 to 27 mnillion in 1995. Part of this increase reflects a sThese findings correlate with earlier findings for Mexico (Cragg and Epelbaum, 1994) as well as for Chile, following its trade liberalization program (Robbins, 1994).  10 rebound from the expenditure cuts that were made in response to the debt crisis in 1982. By 1994, however, total spending on education had risen to 5.4 percent of GDP, or almost a full percentage point above its previous peak of 4.5 percent reached in 1982. Figure 3 MEXICO Education Spending per Student Capita 3500.00 - 8 3000.00 Prvate o 2500.00 Z2000.00- 1500.00- Muipa aC 1000.00 O 500.00 Federal Source: Informe de Gobiemo, 1989 and 1997. Figure 3 describes the evolution of funding for education in Mexico since the early 1980s. Private spending represenited less than 10 percent of total expenditures in education in 1987, and has fallen to below 5 percent in recent years. (This figure somewhat underestimates total private costs, which, with some adjustments noted in the Annex could be around 27% of total education spending.) Similarly, the share of state and municipal spending peaked at 17% of total spending in 1990, but since then also declined to less than 10 percent of total spending. The federal government, on the other hand, currently accounts for 87 percent of total sector spending. These figures are not far out of line with those from an OECD review of education expenditures, which indicated that in 1994, about 19 percent of spending on education in Mexico came from private sources, compared to a country average of 13 percent for the whole of the OECD.9 Mexico does not stand out particularly in the preceding comparison. As in most countries, the public sector directly or indirectly finances the lion's share of education expenditures. Mexico does stand out in contrast to its OECD partners, however, when these expenditures are disaggregated by level of instruction. As shown in OECD (1998, pg. 97) the ratio of spending per student at the tertiary level compared to spending at the primary level exceeded 500 percent in 1994 and was the highest among OECD countries. (The ratio in Korea, for example, is close to the OECD average of 264 percent, or less than half the Mexican ratio.) 9These figures comprise total expenditures on education, including privately purchased materials, whereas the earlier figures shown in Table 3 are identical to the what the OECD expenditure review refers to as direct spending on educational institutions.  11 Table 4: Federal Education Spending per Student by Level Federal Spending per Student (constant 1994 Pesos) (as share spent on Primary) primary secondary preparatory university prim. second. prep. univ. 1980 1166.1 2571.8 4823.7 8667.3 1 2.2 4.1 7.4 1981 1447.6 2790.6 6156.9 11544.0 1 1.9 4.3 8.0 1982 935.8 2027.3 4586.4 10061.0 1 2.2 4.9 10.8 1983 710.5 1562.0 2714.7 6451.4 1 2.2 3.8 9.1 1984 691.1 1644.3 3108.4 6544.2 1 2.4 4.5 9.5 1985 715.0 1473.3 3582.2 7174.8 1 2.1 5.0 10.0 1986 961.5 2094.6 3329.3 11686.2 ' 2.2 3.5 12.2 1987 683.7 1308.3 3364.0 6334.3 1 1.9 4.9 9.3 1988 665.1 1303.0 3423.0 6520.2 1 2.0 5.1 9.8 1989 734.0 1438.9 3756.0 6176.3 1 2.0 5.1 8.4 1990 808.4 1685.8 3502.8 6473.5 1 2.1 4.3 8.0 1991 1011.4 1942.6 3772.9 6898.3 1 1.9 3.7 6.8 1992 1285.9 2318.7 3384.3 9313.2 1 1.8 2.6 7.2 1993 1584.6 2568.4 4304.6 11637.2 1 1.6 2.7 7.3 1994 1731.3 3139.4 5215.1 13253.0 1 1.8 3.1 7.7 1995 1679.0 2511.0 4508.1 11202.3 1 1.5 2.7 6.7 1996 1647.7 2464.2 4442.9 11328.5 1 1.5 2.7 6.9 1997 1811.9 2709.7 4882.1 12692.2 1 1.5 2.7 7.0 Source: Presidencia de la Republica, Primer Informe de Gobiemo, 1989, and Tercer Informe de Gobiemo, 1997. The great disparity in per-student spending at different education levels in Mexico is also reflected in Table 4, which only refers to federal expenditures. This Table also shows, however, that the evolution of public spending on education in Mexico has become more egalitarian across different schooling categories over time. In the early 1980s, the amount of federal spending per university student averaged 10 times the amount spent per primary student. This ratio fell to around 7 times in the early 1 990s. Federal spending on the other levels relative to the primary level indicate a similar decline, even though the absolute amounts increased at all levels. In other words, even though the recent pattern of spending on education in Mexico exhibited a highly uneven bias in favor of tertiary education relative to other categories, the pattern of spending in earlier periods exhibited and even greater bias. D. The Rates of Return on Investments in Education One way to assess the economic merits of the preceding spending patterns, considered as investments in education, is by comparing their relative rates of return. This section compares the rates of return to education as derived from several human capital earnings functions. These were estimated with data from two income-expenditure surveys (ENIGH) carried out by the National Statistical Institute (INEGI) in the third quarters of 1984 and 1994. These two survey years provide an excellent setting for comparisons: first, both years can be considered macroeconomically comparable in that the economy is neither in recession nor booming. Secondly, both years are almost equi- distant in time from the major stabilization and structural reform measures implemented  12 by the Mexican Government in the latter half of the 1980s. They are especially suitable, therefore, for making 'before and after' comparisons. The ENIGH surveys identify the educational attainment, income received and number of hours worked per week by each family member.'0 Income is differentiated into about 25 items, which were aggregated into three broad categories: (i) wage and salary income, (ii) current monetary income, which includes wages and salaries, income from self-employment, property income and rents, monetary transfers and income from financial assets, and (iii) total current income, which includes all of the above items, plus non-monetized income such as imputed rent, in-kind transfers and stock dividends. In contrast to this disaggregation of income sources, the ENIGH surveys do not differentiate the number of hours worked per week by activity. The rates of return calculated below are based on two measures of earnings per hour: the wage rate, which refers to wage and salary earnings per week, divided by the total number of hours worked per week, and the monetary earnings rate, which refers to current monetary income divided by the same number of hours worked per week. Tables 5 and 6 present the private and the public rates of return on investments in education in Mexico. The method used to estimate these rates of return is explained in detail in the Annex. The distinction between public and private rates of return in this context centers around who bears the cost of financing the investment in education: in both cases, the benefits of an additional year of schooling are reflected in the stream of additional earnings that accrue to an individual as a result of that additional education. The rate of return to education is then the discount rate that equates the present value of this stream of additional earnings to the present value of the costs incurred. When only private costs are considered in this calculation, it is tenned the private rate of return, and when all public and private costs are considered, it is termed the social rate of retum. Table 5: Private Rates of Return to Schooling in Mexico (Private cost of education is 100% of foregone full year's earnings; KP = 1.) Wage Earners Monetary Income Recipients 1984 1994 1984 1994 Average "Mincerian" 15.2% 16.7% 14.6% 17.2% by schooling level 1 - primary complete 16.9% 13.8% 14.7% 14.3% 2 - secondary complete 13.9% 16.7% 14.5% 16.0% 3 - preparatory complete 15.5% 18.2% 14.4% 19.2% 4 - university and above 10.3% 19.9% 12.8% 20.6% Source: Tables Aland A2, using the method described in the Annex.