This paper proposes a new model of the link between expanding trade and rising wage inequality in developing countries, and investigates its causal implications in a newly constructed panel of Mexican manufacturing establishments. In a theoretical setting with heterogeneous rms and quality dierentiation, only the most productive rms in a developing country like Mexico enter the export market, and they produce a better-quality good for export than for the domestic market in order to appeal to richer developed-country consumers. Producing high-quality goods requires paying high wages both to white-collar and to blue-collar { but especially to white-collar { employees. An increase in the incentive for developing-country producers to export generates dierential quality upgrading within industries, as more-productive rms increase exports and produce a greater share of high-quality goods, while less-productive rms remain focused on the domestic market. This process raises wage inequality both between rms and within the rms that upgrade. The empirical part of the paper uses a major exchange rate shock { the Mexican peso crisis of late 1994 { to test this causal mechanism. I nd robust evidence that during the years of the crisis initially more-productive plants increased both white-collar and blue-collar wages and increased the relative wage of white-collar workers as compared to initially less-productive plants. This pattern is absent in the periods before or after the crisis years. The results thus provide strong support for the hypothesis that dierential quality upgrading induced by the exchange rate shock contributed to the increase in wage inequality in Mexico in the mid-1990s.

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Trade, Quality Upgrading and Wage Inequality in the Mexican Manufacturing Sector: Theory and Evidence from an Exchange-Rate Shock

This report describes how tertiary education contributes to building up a country's capacity for participation in an increasingly knowledge-based world economy and investigates policy options for tertiary education that have the potential to enhance economic growth and reduce poverty. It examines the following questions: What is the importance of tertiary education for economic and social development? How should developing and transition countries position themselves to take full advantage of the potential contribution of tertiary education? How can the World Bank and other development agencies assist in this process? The report draws on ongoing Bank research and analysis on the dynamics of knowledge economies and on science and technology development. Using this background, it explores how countries can adapt and shape their tertiary education systems to confront successfully the combination of new and old challenges in the context of the rising significance for tertiary education of internal and international market forces. It examines the justification for continuing public support of tertiary education and the appropriate role of the state in support of knowledge-driven economic growth. Finally, it reviews the lessons from recent World Bank experience with support of tertiary education, including ways of minimizing the negative political impact of reforms, and makes recommendations for future Bank involvement.

Constructing knowledge societies : new challenges for tertiary education

Growth theory traditionally assumed the existence of an aggregate production function, whose existence and properties are closely tied to the assumption of optimal resource allocation within each economy. We show extensive evidence, culled from the microdevelopment literature, demonstrating that the assumption of optimal resource allocation fails radically. The key fact is the enormous heterogeneity of rates of return to the same factor within a single economy, a heterogeneity that dwarfs the cross-country heterogeneity in the economy-wide average return. Prima facie, we argue, this evidence poses problems for old and new growth theories alike. We then review the literature on various causes of this misallocation. We go on to calibrate a simple model which explicitly introduces the possibility of misallocation into an otherwise standard growth model. We show that, in order to match the data, it is not enough to have misallocated factors: There also needs to be important fixed costs in production. We conclude by outlining the contour of a possible non-aggregate growth theory, and review the existing attempts to take such a model to the data.

/pdf/growth-theory-through-the-lens-of-development-economics-1x5830j42x.pdf

Growth Theory Through the Lens of Development Economics

Task force members -- Preface -- Acknowledgments -- Abbreviations -- Millennium Development Goals -- Executive summary -- Part Setting the stage -- Chapter-1 The task force's contribution -- Task force methods -- Audience and organization of the report -- The contribution of the task force -- Chapter-2 Education and society: multiple benefits, unrealized potential -- Education is society's main instrument for reproducing itself and can be a key ingredient for social change -- Education is an end in itself and has tremendous benefits for individuals and society -- The benefits of education are conditioned by the context -- Chapter-3 The Goals and the history of goal-setting in education -- A host of factors affect enrollment and retention rates -- Learning achievement needs to be measured -- Conclusions and future prospects -- Part Education systems in developing countries: income, institutions, and incentives -- Chapter-5 Education systems in developing countries -- High-performing educational systems can achieve results even with limited resources -- Countries with low-performing systems need to address a variety of governance problems -- Conclusion -- Chapter-6 Strategies for creating more and better educational opportunities -- Strategy : get out-of-school children into school -- Strategy : create better institutions, increase transparency, and provide better incentives -- Chapter-7 Financing the education Goals -- Part . Forging an international compact for education: roles and responsibilities of donors and developing countries -- Chapter-8 A global compact for basic education -- Chapter-9 What donors should do -- Recommendation : support bold political leadership and provide firm financial commitments to make Education for All and the Fast Track Initiative work -- Recommendation : reform the donor business -- Recommendation : use a transparent accountability framework for reporting -- Recommendation : invest in genuine evaluation -- Chapter-10 A call to action -- Appendixes -- Appendix-1. Commissioned papers for education report -- Appendix-2. Summary of the civil society e-discussion on the education report of the Task Force on Education and Gender Equality -- Appendix-3. Success stories in policy interventions toward high quality universal primary education -- Appendix-4. Data issues -- Appendix-5. Major initiatives that promote the Millennium Development Goals on education and gender equality -- Appendix-6. Need for postprimary education -- Notes -- References.

Towards Universal Primary Education: Investments, Incentives, and Institutions.

Growth theory has traditionally assumed the existence of an aggregate production function, whose existence and properties are closely tied to the assumption of optimal resource allocation within each economy We show extensive evidence, culled from the micro-development literature, demonstrating that the assumption of optimal resource allocation fails radically The key fact is the enormous heterogeneity of rates of return to the same factor within a single economy, a heterogeneity that dwarfs the cross-country heterogeneity in the economy-wide average return Prima facie , we argue, this evidence poses problems for old and new growth theories alike We then review the literature on various causes of this misallocation We go on to calibrate a simple model which explicitly introduces the possibility of misallocation into an otherwise standard growth model We show that, in order to match the data, it is enough to have misallocated factors: there also needs to be important fixed costs in production We conclude by outlining the contour of a possible non-aggregate growth theory, and review the existing attempts to take such a model to the data

/pdf/chapter-7-growth-theory-through-the-lens-of-development-4u379aw35d.pdf

Chapter 7 Growth Theory through the Lens of Development Economics

The educational attainment of Brazil's labor force, has gradually increased over the past two decades. At the same time, the government has pursued a series of economic structural adjustment policies. The authors investigate how these simultaneous advances have altered the relationship between labor market earnings, and education. They find that the returns to education in the labor market, fundamentally changed between 1982, and 1998. While the returns to tertiary education increased sharply, the returns to primary education dropped by 26 percent, and those to lower secondary, by 35 percent. Moreover, the authors argue, the marginal reduction in wage inequality that occurred in this period was linked primarily to a reduction in the returns to schooling, and only secondarily, to a more equitable distribution of schooling. The findings suggest that the supply of highly skilled labor is inadequate to meet demand. That suggests a need for policy action aimed at increasing access to, and completion of tertiary education. Increasing the supply of highly skilled labor, would improve prospects for both economic growth, and reduce wage inequality.

Education, earnings, and inequality in Brazil, 1982-98 - implications for education policy

Improving access to tertiary education in Brazil would expand the supply of highly skilled labor - now too small to meet demand - enhancing prospects for both greater economic growth and lower wage inequality. The educational attainment of Brazil's labor force has gradually increased over the past two decades. At the same time, the government has pursued a series of economic structural adjustment policies. Blom, Holm-Nielsen, and Verner investigate how these simultaneous advances have altered the relationship between labor market earnings and education. They find that the returns to education in the labor market fundamentally changed between 1982 and 1998. While the returns to tertiary education increased sharply, the returns to primary education dropped by 26 percent and those to lower secondary by 35 percent. Moreover, the authors argue, the marginal reduction in wage inequality that occurred in this period was linked primarily to a reduction in the returns to schooling and only secondarily to a more equitable distribution of schooling. The findings suggest that the supply of highly skilled labor is inadequate to meet demand. That suggests a need for policy action aimed at increasing access to and completion of tertiary education. Increasing the supply of highly skilled labor would improve prospects for both economic growth and reduced wage inequality. This paper - a product of the Education Sector Unit, Latin America and the Caribbean Region - is part of a larger effort in the region to assess the need for expansion of the education system, in particular, tertiary education. The authors may be contacted at ablom@worldbank.org, lholmnielsen@worldbank.org, or dverner@worldbank.org.

https://papers.ssrn.com/sol3/Delivery.cfm/2466.pdf?abstractid=632754&mirid=5&type=2

Lauritz Holm-Nielsen

Papers

Education, earnings, and inequality in Brazil, 1982-98 - implications for education policy

Education, Earnings, and Inequality in Brazil, 1982-98: Implications for Education Policy

Education, Earnings, and Inequality in Brazil, 1982-98: Implications for Education Policy. Policy Research Working Paper.

Education, earnings, and inequality in Brazil, 1982-98 - implications for education policy