An Example: The Case of Mexico

This paper examines Mexico's increase in wage inequality using data from household surveys (Encuesta Nacional de Ingreso Gasto de los Hogares de México) produced by the Mexican Institute for Statistics, Geography and Informatics (Instituto Nacional de Estadística, Geografía e Informática). An econometric simulation technique based on Juhn, Murphy, and Pierce (1993) and developed for the household level by Bourguignon, Fournier, and Gurgand (1998) is used to measure the contribution of changes in skill premiums and sector returns to the increase in inequality in Mexican males' wages during the period of analysis. The household surveys used in this paper make it possible to decompose some of the changes in inequality in Mexico after trade reform in the mid-1980s. The regressions and simulation technique confirm that male Mexican wage earners experienced an important increase in skill premiums and a decrease in sector wage premiums after the trade reform. The increase in skill premiums was unequalizing, while the decrease in sector premiums was equalizing.

Notwithstanding the progress that has been made over the past decade, the challenges currently facing the Mexican education system must be tackled without delay. A preliminary step to developing appropriate strategies to compensate for the uneven results obtained by students as a result of socioeconomic and cultural factors was to analyze the relationship between the funding of education and equity in Mexico, as well as discern new challenges to be faced in this area in order to eliminate social inequialities and improve the quality of education. We collected information via participant observation and documentary analysis, using materials such as UNESCO’s Second Comparative and Explanatory Regional Study, and the Instituto Nacional para la Evaluación de la Educación de México [National Institute for the Evaluation of Education in Mexico] in order to further our knowledge of this complex area of study. The results we obtained confirm that formal education in Mexico in no way guarantees effective equality of opportunity, nor does it reduce the social inequalities stemming from socioeconomic context and family background; on the contrary it reproduces, multiplies and even intensifies the differences that exist before the pupil has even entered the school system.

On the Character and Causes of Inequality in Latin America

The chapter analyzes the vicious circle of economic and political inequality in Mexico. It presents a critique of the view that education can be an equalizer given its economic value, and argues that the reduction of inequality in Mexico is not only about having a better-educated workforce, but also about enhancing the political competence of its citizens. Considering that redistributive policies beyond education are more likely to reverse inequality, this means educating citizens that are able to influence the arena in which such policies need to be made despite prevailing political inequalities. To this end, the chapter advances three main proposals for citizenship education in Mexico: (1) teaching and learning about inequality, (2) recognizing and developing students' politicity, and (3) educating for effectiveness in political participation. These recommendations are the result of examining the gap between current citizenship education in Mexico and the citizens demanded by the existing context of inequality.

Introducing an employment variable with five levels of educational attainment per capita and employing inequality decomposition, this study addresses three questions. How does labour force vary by education and provinces? How does labour force utilization vary by education and provinces? What are the potential causes of differences? We find that the no‐primary‐education group is more endowed in less‐developed provinces and allocated most unequally among education groups across provinces, despite past universal primary education policies. The senior‐secondary‐education group with the largest labour share is a growing concern due to the lower employment rate and largest interprovincial inequality.

The present paper analyzes the challenge to redistribution programs posed by an increase in the skill premium. The skill premium affects both the profitability of education and the profitability of migration. We propose a two country, median voter model, where the equilibrium tax policy is shaped by the desire of the median voter to promote skill formation and to avoid emigration of skilled individuals. Our paper shows that the effect of an increase in the skill premium on redistributive programs depends on the initial level of the skill premium. Below a critical level, an increase in the skill premium is met by an increase in the tax rate. Beyond this level, however, a further rise in the skill premium leads to a fall in the tax rate, and hence a sharp increase in post-tax inequality.

This study analyzes the transmission mechanism for the increase in the skill premium caused by international outsourcing through skill‐biased technological change (SBTC). Using 2000–2013 panel data from 27 manufacturing industries in China, this study conducts both probit and Tobit tests and shows that international outsourcing led to SBTC in China's manufacturing industries. A positive correlation is found between international outsourcing and the increase in the skill premium in both static and dynamic models. For each 1‐percent increase in the international outsourcing index, the skill premium will rise approximately 10 percent. This finding indicates the existence of a mechanism through which the effect of international outsourcing on the skill premium is reinforced where SBTC is occurring. However, this may enlarge wage gaps within the same industry. Therefore, China should not only use the skill premium to promote the transformation and upgrading of industries benefiting from outsourcing and optimize the structure of employment but also prevent the negative effects of an increased skill premium.

Previous articleNext article FreeEditorialMartin Eichenbaum, Erik Hurst, and Jonathan A. ParkerMartin EichenbaumNorthwestern University and NBER Search for more articles by this author , Erik HurstUniversity of Chicago and NBER Search for more articles by this author , and Jonathan A. ParkerMIT and NBER Search for more articles by this author Northwestern University and NBERUniversity of Chicago and NBERMIT and NBERPDFPDF PLUSFull Text Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinked InRedditEmailQR Code SectionsMoreThe NBER’s thirty-fourth Annual Conference on Macroeconomics brought together leading scholars to present, discuss, and debate six research papers on central issues in contemporary macroeconomics. In addition, James Stock, former chief economist and director of research at the International Monetary Fund, delivered a thought-provoking after-dinner talk on the economics of climate change. Video recordings of the presentations of the papers and the after-dinner talk are all accessible on the web page of the NBER Annual Conference on Macroeconomics (https://www.nber.org/macroannualconference2019/macroannual2019.html). These videos, which make the content of the conference more widely accessible, are a useful complement to this volume.This conference volume contains edited versions of the six papers presented at the conference, each followed by two written comments by leading scholars and a summary discussion of the debates that followed each paper. The volume also contains a paper, “Climate Change, Climate Policy, and Economic Growth,” by James Stock, based on his dinner talk. The paper provides an extremely useful introduction to the topic of climate change and climate change policy for macroeconomists. The paper makes four key points. First, simple time-series regression models confirm that essentially all the warming over the past 140 years is due to human activity. Second, policy has a crucial role to play if we are to succeed in decarbonizing the economy. Third, current policies will not succeed in decarbonizing the economy in time to prevent severe damage from climate change. Fourth, the politics, as opposed to the economics, of Pigouvian carbon pricing do not work. This suggests the importance of considering other policies, especially those that drive low-carbon technical innovation.There was no discussant for the paper because of its origin as a dinner talk. We are grateful to James Stock for taking the time to write up his comments on this vitally important topic.During the last two decades in the United States, production has become more concentrated, with a smaller set of firms producing a larger fraction of aggregate output. During that same time, firm profits have increased, labor share of output has fallen, and firm investment has decreased. Is increased concentration the efficient response to changing consumer behavior or technology? Or is increasing concentration the inefficient result of increased barriers to firm entry?These questions are explored in the paper “From Good to Bad Concentration? US Industries over the Past 30 Years,” by Matias Covarrubias, Germán Gutiérrez, and Thomas Philippon. Covarrubias et al. draw on insights from the industrial organization literature and provide a simple framework to highlight that increasing concentration is a market outcome and can be the equilibrium result of either less market competition or more market competition.Using a variety of aggregate data sources, the authors find that during the 1990s, increased aggregate concentration was correlated with rising productivity, falling prices, and higher investment. These findings are consistent with models where increased concentration is driven by increases in the returns to scale in firm production and/or increases in the elasticity of substitution across consumption goods. The authors conclude that the increased concentration in the United States during the 1990s reflected “good” concentration. However, during the 2000s, increased aggregate concentration was correlated with falling productivity growth, rising prices, and falling investment. These findings are consistent with increasing barriers to firm entry during the 2000s. The authors conclude that much of the increased concentration during the 2000s reflects an increase in “bad” concentration.In the last part of their paper, the authors use cross-industry variation to shed further light on the causes of increased concentration during the 2000s. The authors conclude that the aggregate results may be too coarse to accurately reflect the underlying causes of increased concentration. By exploiting cross-industry variation, the authors conclude that multiple forces are responsible for the increased concentration observed in the United States during the 2000s. Although increased barriers to entry are part of the story—particularly in some industries—changes in firm technology and consumer demand patterns are also an important part of the story.Both of the discussants applaud the authors for their careful data work and for laying out a simple framework to discuss the potential causes of increased concentration. Both also agree that the cross-industry results are more interesting in that they highlight that multiple factors are likely changing simultaneously within the US economy during the 2000s.Real wages among lower income groups in the United States have grown very little since the late 1960s. Even strikingly, there has been a reduction in life expectancy among white men born in the 1960s relative to the previous generation. Such declines are not supposed to happen in a healthy growing economy. Margherita Borella, Mariacristina De Nardi, and Fang Yang study this decline in well-being in “The Lost Ones: The Opportunities and Outcomes of White, Non-College-Educated Americans Born in the 1960s.” The paper develops a structural life cycle model to quantify the economic outcomes of less educated Americans born in the 1960s.The paper begins by confirming and documenting a number of important facts about less educated white Americans, largely using the Panel Study of Income Dynamics. Real wages declined between these generations for less educated women (who started from a lower starting point), and postretirement, out-of-pocket medical expenses rose dramatically. Expected life spans declined for both men and women.The paper analyzes these changes by estimating a rich structural model of life cycle consumption and saving on those born in the 1960 cohort. Taking the estimated preference parameters as given, the authors ask how this generation would have behaved and fared if instead they had faced the wages, medical costs, and health/longevity of those born in the 1940s. The results are striking.The decline in wages that men born in the 1960s faced lowered their labor supply, whereas that of women increased slightly; the decrease in life expectancy reduced their saving, but the increase in out-of-pocket medical expenses increased by more. Thus, together, consumption falls significantly. The welfare decline is large, ranging from an equivalent of 7% to 13% of lifetime income depending on gender and marital status.The discussants raised a number of important issues, including whether actual inflation was lower than measured inflation. To the extent this was the case real wages for less educated white men have not fallen. Of course, such mismeasurement of inflation does not alter the declines in life spans. Another issue that was discussed was how to measure the welfare costs of lower life spans.The financial crisis of 2007–8 and the ensuing recession led central banks around the world to lower short-term interest rates to values near their (rough) lower bound of zero. The Federal Reserve kept its policy rate at that level until the end of December 2015. As a result, the Fed could not use short-term interest rates to combat the recession or fight incipient deflationary pressures. In their paper, “On the Empirical (Ir)Relevance of the Zero Lower Bound Constraint,” Davide Debortoli, Jordi Galí, and Luca Gambetti investigate whether this constraint affected the performance of the US economy. They do so by assessing the extent to which the constraint affected the volatility of US macro aggregates and the response of those aggregates to various shocks. They find very little evidence that the constraint materially affected the economy.This finding is very surprising from the perspective of standard macroeconomic models like the New Keynesian (NK) model. One’s first reaction is that this finding is a power issue. But the paper’s evidence is persuasive that power is not the issue. From the perspective of the NK model, one should be able to detect substantial effects on macro aggregates when the zero lower bound binds, even in sample sizes as small as those available to the authors.How can we explain this important finding? According to the authors, the answer is that policy makers developed new tools that were effective in making the zero lower bound constraint not constraining. The prime examples are forward guidance and “unconventional” purchases of long-term assets. The paper’s findings are clearly very important, especially in a world where, going forward, short-term policy interests are likely to hit the zero lower bound much more frequently.The first discussant examined factors, other than the effectiveness of the new tools developed by monetary policy makers, that could explain the authors’ main results. He also investigated whether the authors’ findings are consistent with other more direct evidence regarding the effectiveness of nonstandard policies. The second discussant raised important methodological questions about statistical inference in sign-restricted structural vector autoregressions, one of the methods used in the paper.Many researchers and members of the commentariat have announced the death of the Phillips curve. This view is based on the apparent weak statistical relationship between inflation and various measures of unused economic capacity. The latter include unemployment and estimates of the output gap. Such claims, if true, would pose an important challenge to the way macroeconomists think about fluctuations in economic activity and the paradigm within which central banks conduct policy.In their paper “Optimal Inflation and the Identification of the Phillips Curve,” Michael McLeay and Silvana Tenreyro challenge the validity of these claims. Their argument is as follows. Suppose that policy makers seek to minimize welfare subject to a structural Phillips curve. In that world, policy makers will raise inflation when output is below its full potential. Therefore, the better policy makers are at their job, the harder it will be to see a positive relationship between inflation and output. Simple correlations between inflation and output are completely uninformative about the presence of a structural Phillips curve or its slope.The authors explore the problem of identifying the slope of the Phillips curve under various assumptions about the ability of policy makers to commit to a policy rule, the nature of the shocks to the economy, and the availability of data from different parts of an economy subject to different shocks. The first part of their analysis is conducted within the confines of a simple NK model. To assess the robustness of their results, they also investigate the problem using a full-scale dynamic stochastic general equilibrium model. Finally, the authors consider practical attempts to overcome the problem of identifying the slope of the Phillips curve. One particularly promising approach is the use of cross-sectional regional variation in unemployment.In sum, the paper makes a very important contribution to a topic that is extremely relevant to the academic literature and ongoing policy debates.Both discussants spoke enthusiastically about the paper, framing the analysis in terms of the classic problem of identifying a demand or a supply curve from market data. Like those curves, the Phillips curve is a structural relationship, not a reduced-form relationship. This simple but fundamental point is often neglected in popular discussions of the Phillips curve. Both discussants examined the theoretical underpinning of the structural Phillips curve and the practical difficulties of identifying that curve. In addition, one discussant contrasted the reduced-form relationship between inflation and unemployment with the relationship between wage growth and inflation, analyzing the latter in detail.There has been a large rise in US income inequality over the last four decades. In their paper “Trading Up and the Skill Premium,” Nir Jaimovich, Sergio Rebelo, Arlene Wong, and Miao Ben Zhang highlight a relatively unexplored mechanism that could be contributing to the rising skill premium. Their mechanism stems from two assumptions. First, households “trade up” to higher-quality products as they become richer. Second, higher-quality products are more skill intensive. Together, the assumptions imply that as an economy grows, the demand for skills will endogenously grow, providing an additional force generating upward pressure on the skill premium.Jaimovich et al. begin their paper by providing empirical support for the two assumptions at the heart of their mechanism. First, using data from the Nielsen Homescan database and the Consumer Expenditure Survey, the paper documents that richer households do, in fact, purchase higher-quality goods. Second, using data from Yelp matched with microdata from the Occupational Employment Statistics, the paper shows that higher-quality goods are produced with a higher share of skilled workers. Both discussants emphasized that this empirical work is an important contribution to the literature.The paper provides a simple model of trading up. The goal of the model is to quantitatively explore the extent of skill-biased technological change that is needed to generate the observed increase in the skill premium in the United States over the last 40 years. In their model, the endogenous skill upgrading results in a larger change in the skill premium with lower amounts of skill-biased technological change. According to their calibrated model, the extent of skill-biased technological change that is needed to match the data is only 1.1% per year as opposed to 5.5% per year in a model without skill upgrading. Although the mechanism is novel and should stimulate further research, both discussants stressed that the authors’ model is too simple to provide a definitive quantitative assessment of the importance of skill upgrading as an explanation for the rising skill premium.Our final paper takes up the important topic of economic growth in China. China has undergone a 30-year economic growth miracle despite economic and political institutions that look nothing like those that appear to be required for prosperity in most of the rest of the world. A fascinating paper by Chong-en Bai, Chang-Tai Hsieh, and Zheng Song, “Special Deals with Chinese Characteristics,” argues that the lack of formal institutional, legal, and jurisprudential constraints on politicians creates growth because it has been combined with high-powered incentives.The paper proposes a theory in which local politicians compete against other localities to maximize local economic growth. The lack of formal and regulatory constraints on politicians means that local officials are free to favor certain industries and to promote particular businesses by handing out “special deals.” In many countries, this lack of oversight leads to economic stagnation. But in China, local officials have high-powered incentives instead of formal legal oversight. Politicians’ careers benefit from growth, as their locality grows in importance and as their success increases their stature with the central Chinese authorities. They also benefit financially, as they often invest in the businesses in their locality that they are backing. When things go badly, the penalties for local officials can include criminal charges.The paper brings a range of evidence to support its case. Most novel, in an almost ethnographic approach, the authors describe the workdays of local officials as akin to those of venture capitalists in a Western economy—visiting company headquarters, evaluating business strategies, pulling together financing, and so forth. The authors further elucidate their ideas in a model and show a number of facts about the Chinese economy that are consistent with their interpretation.The discussants raise a number of concerns with this theory of Chinese growth and argue that the sources of rapid growth in China remain mysterious. They question whether the incentives are really high powered, and how they are maintained. Further, local politicians often erect barriers to intra-China trade, which would seem to work against strong economic growth.As in previous years, the editors posted and distributed a call for proposals in the spring and summer prior to the conference, and some of the papers in this volume were selected from proposals submitted in response to this call. Other papers are commissioned on central and topical areas in macroeconomics. Both are done in consultation with the advisory board, which we thank for its input and support of both the conference and the published volume.The authors and the editors would like to take this opportunity to thank Jim Poterba and the National Bureau of Economic Research for their continued support for the NBER Macroeconomics Annual and the associated conference. We would also like to thank the NBER conference staff, particularly Rob Shannon for his continued excellent organization and support. We would also like to thank the NBER public relations staff and Charlie Radin in particular for overseeing the high-quality multimedia content. Financial assistance from the National Science Foundation is gratefully acknowledged. We also thank the rapporteurs, Nathan Zorzi and Riccardo Bianchi Vimercati, who provided excellent assistance in the preparation of the summaries of the general discussions. And last but far from least, we are grateful to Helena Fitz-Patrick for her invaluable assistance in editing and publishing the volume.Endnote. For acknowledgments, sources of research support, and disclosure of the authors’ material financial relationships, if any, please see https://www.nber.org/chapters/c14232.ack. Previous articleNext article DetailsFiguresReferencesCited by NBER Macroeconomics Annual Volume 342019 Sponsored by the National Bureau of Economic Research (NBER) Article DOIhttps://doi.org/10.1086/707168 © 2020 by the National Bureau of Economic Research. 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Inequality in education accounts for a large share of the inequality in earnings in Mexico. But the increase in earnings inequality does not appear to reflect a worsening in the distribution of education. The cause instead appears to be skill-biased technological change facilitated by increased economic openness

Effect of intra-industry trade on skill premium in manufacturing in China

We analyse the skill premium and the growth rate in an innovator-imitator general equilibrium growth model assuming (i) internal costly investment in both physical capital and R&D, (ii) complementarities between intermediate goods in production and (iii) technological-knowledge diffusion. We find that in the imitator country these three elements influence the economic growth rate and the skill premium. In the innovator country, while the growth rate is affected by costly investment and complementarities, the skill premium is not affected by any of our assumptions. It depends solely on the productive advantage of high-skilled over low-skilled labour, which suggests that the sustained increase in the skill premium observed in several developed countries over the last three decades may have been due to increases in such productive advantage.

This study delves into the intricate dynamics of technology, labor markets, and economic growth within the context of Industry 4.0. By integrating automation capital into a dynamic general equilibrium model, we examine its implications for economic performance and social equity. The empirical analysis highlights the substitutability of unskilled labor by automation, revealing a nuanced relationship between automation adoption, the skill premium, and economic growth. Contrary to conventional wisdom, our findings suggest that a reduced ratio of unskilled to skilled labor, driven by automation, can lead to both an increase in the skill premium and sustained economic growth, even in the face of demographic challenges such as declining populations. However, this trend also exacerbates income inequality, underscoring the imperative for policy interventions aimed at promoting skill enhancement and ensuring equitable distribution of technological advancements.

The skill premium and economic growth with costly investment, complementarities and international trade of intermediate goods

The 2x2x2 Heckscher-Ohlin model predicts that trade openness causes the skill premium to increase in the skill abundant developed countries, and to decrease in the skill scarce developing countries, after trade openness. Empirical evidence, however, shows that the skill premium declined in some developing countries, while others experienced an increase in wage inequality. This paper develops a North-South model, where firms produce a low-skilled and a high-skilled intensive good. The production of a unit of either good involves a continuum of L-tasks and H-tasks. The L-tasks can be performed by low-skilled workers only, and the H-tasks can be performed by high-skilled workers only. The Northern firms can produce the task in their headquarters, or offshore the task to the South. The results suggest there is a threshold skill abundance level in the South, above which countries experience an increase in the skill premium after an improvement in the offshoring technology, and below which countries experience a decrease in the skill premium. In this context, the North offshores the H-tasks to countries that are relatively more abundant in high-skilled labor, and L-tasks to countries that are relatively more abundant in low-skilled labor. Therefore, countries that become the hosts of L-tasks experience a decrease in the skill premium, because there will be higher demand for their low-skilled workers, while those that become the hosts of the H-tasks will experience an increase in the skill premium, because there will be higher demand for their high-skilled workers. This accounts for the asymmetric patterns of skill premia in the South.

The returns to schooling and the skill premium are key parameters in various fields and policy debates, including the literatures on globalization and inequality, international migration, and technological change. This paper explores the skill premium and its correlation with exports in Latin America, thus linking the skill premium to the emerging literature on the structure of trade and development. Using data on employment and wages for over seven million workers from sixteen Latin American economies, the authors estimate national and industry-specific returns to schooling and skill premiums and study some of their determinants. The evidence suggests that both country and industry characteristics are important in explaining returns to schooling and skill premiums. The analyses also suggest that the incidence of exports within industries, the average income per capita within countries, and the relative abundance of skilled workers are related to the underlying industry and country characteristics that explain these parameters. In particular, sectoral exports are positively correlated with the skill premium at the industry level, a result that supports recent trade models linking exports with wages and the demand for skills.