Changes in human capital and earnings inequality: Recent evidence from Brazil 1

Abstract

This paper estimates changes in the rates of return to human capital across the earnings distribution using data from over a 10-year period for Brazil. It uses these estimates to simulate the separate impacts of changes in returns to skills and changes in the supply of skills on earnings inequality. Evidence points strongly to growing inequality in rates of return to education in Brazil. This finding suggests that recent macroeconomic and trade reforms have been of most benefit to the skilled rather than the unskilled. Supporting evidence points to an improved competitiveness in the labour market, with workers increasingly rewarded for productivity. However, although increases in returns to education are more pronounced at the top of the earnings distribution, this did not in practice led to increased inequality. This is because levels of education and other labour market-rewarded endowments have increased and offset the rate of return effect. Appropriate education policy is therefore an essential partner for macroeconomic and trade reform if a developing economy is to avoid worsening income inequality.     

Labour Market Impacts of School Expenditure and Class Size: Evidence from China

This study is a first attempt to estimate the impact of school resources on students’ subsequent labour market earnings in China. Combining unprecedented school data from the early 1950s to the 1990s with household survey data in the 2000s, this paper documents that expenditure-per-pupil, a proxy measure of school resources (or quality) has a significant impact on the level of subsequent earnings through its influence on education returns. The positive effect calls for policy intervention aimed at improving education, to be based on the perceived economic return to the quantity as well as the quality components of education.     

Who Suffers the Penalty?: A Panel Data Analysis of Earnings Gaps in Vietnam

In spite of its predominant economic weight in developing countries, little is known about the informal sector earnings structure compared to that of the formal sector. Taking advantage of the rich VHLSS dataset in Vietnam, in particular its three wave panel data (2002, 2004, 2006), we assess the magnitude of various formal–informal earnings gaps while addressing heterogeneity at three different levels: the worker, the job (wage employment vs. self-employment) and the earnings distribution. We estimate fixed effects and quantile regressions to control for unobserved individual characteristics. Our results suggest that the informal sector earnings gap highly depends on the workers’ job status and on their relative position in the earnings distribution. Penalties may in some cases turn into premiums. By comparing our results with studies in other developing countries, we draw conclusions highlighting Vietnam’s labour market specificity.     

Women's urban labour market status in developing countries: How well do they fare in Khartoum,Sudan?

This article examines the insertion of women in the formal sector labour market in urban Khartoum, Sudan, in order to explain their inferior employment status in one particular developing country environment. A number of hypotheses are tested drawing upon recent labour market theoretical developments and econometric techniques from the literature which have had limited previous applications in Third World settings, particularly in Africa. Our findings indicate that occupational segregation, rather than pay discrimination, is primarily to blame for observed wage differentials suggesting that well‐intentioned equal pay laws will do little to reduce the earnings gap.     

Where has all the education gone in sub-Saharan Africa? employment and other outcomes among secondary school and university leavers

Anecdotal evidence and generalisations abound concerning the employment outcomes of secondary school and university leavers, but there is very little solid, accurate information on what these groups in African countries do after they have completed their education. Using tracer surveys, this paper presents comprehensive time-series information on the activity profiles of representative samples of secondary school leavers and university graduates in Malawi, Tanzania, Uganda, and Zimbabwe. The paper shows that much of the anecdotal evidence surrounding the labour market outcomes of these groups is spurious. While employment outcomes are generally much better than expected, the tracer surveys highlight the enormous challenges of educating and subsequently utilising secondary school leavers and university graduates in an efficient and effective manner in low-income African countries. In particular, given the paucity of new employment opportunities in the formal sector, much more needs to be done in order to ensure that both these groups are better prepared for productive self-employment, especially in high growth and higher skill activities.     

Labour market discrimination against indigenous people in Peru

In this article, the component of the gross wage differential that can be explained by productivity‐enhancing attributes and that which is due to unexplained factors and labour market discrimination are empirically determined. Individual data from the 1991 Living Standards Measurements Survey of Peru are used to analyse labour market earnings and to decompose the gross earnings differential. A large portion of the indigenous/non‐indigenous wage gap is unexplained by human capital and other observable differences.     

Stature,Skills and Adult Life Outcomes: Evidence from Indonesia

We investigate the effect of height on earnings, occupational choices and a subjective measure of wellbeing among Indonesian men. We explore the extent to which height captures the effects of endowments set before entry in the labour market. Physical and cognitive skills, co-determined with stature early in life, do not explain much of the height earnings premium directly. Yet, human capital more broadly, including cognition, educational attainment and other factors related to childhood conditions, explains around half of the height premium and does so through occupational sorting. Indeed, taller workers tend to have more education, and educated workers tend to work in more lucrative occupations that require brain and social skills, not brawn. The unexplained share of the height earnings premium may reflect a specific role of stature on social interaction, labour market advantages or self-assurance. We also find a height premium in happiness, half of which simply accounts for the educational and earnings advantages of taller workers.     

Who Gains More from Education? A Comparative Analysis of Business,Farm and Wage Workers in India

The economics literature on returns to education has focused largely on wage workers, thereby ignoring a sizable section of the workforce which is self-employed. This paper presents the estimates of private returns to education for business, farm and wage workers in India using a nationally representative household survey. The paper addresses the sample-selectivity issue arising due to endogenous sector allocation in the earnings equation using the multinomial-selection approach. Our results show that the average rate of return to education is higher for wage workers followed by business and farm workers. Focusing only on wage workers would provide an overestimate of returns by 30 per cent for business workers and by 40–50 per cent for farm workers. Further, the profile of returns across the education ladder varies perceptibly for the three type of workers with higher education being more rewarding for wage workers.     

The labour market in a dual economy: Another look at colonial Rhodesia

A labour market model is developed for the formal sector of a labour surplus economy, allowing for monopsony power by firm owners and an inelastic supply of labour with respect to the wage rate. This inelasticity arises even though the wage rate in the traditional sector may be ‘fixed’ due to surplus land, and the supply of labour to the traditional sector responds quite positively to an exogenous increase in the (implicit) wage rate there. This labour supply function is derived from a simple utility maximisation model incorporating the spatial aspects of temporary migration to the formal sector.     

Changes in earnings inequality and labour market segmentation: Metropolitan Santiago 1969–78

Changes in earnings inequality are examined in this article through an eclectic approach allowing for differences in human capital earnings function by labour market segments. Several findings are of interest. The first are the components of earnings inequality changes, these being, in order of importance: changes in the within segments inequality, changes in the relative share of the informal sector segment, and changes in relative income between segments. Second, these changes are found to be the result of labour market liberalisation policies such as abolition of both minimum wages and labour turnover legislation in the formal sector, the promotion of self‐employed activities in the informal sector, and, the selective mobility pattern between segments.     

Earnings and ethnicity in Trinidad and Tobago

This study employs 1993 Continuous Sample Survey of the Population (CSSP) data for Trinidad and Tobago to investigate the determinants of earnings by ethnicity. The data, organised into three ethnic groupings, reveal lower levels of remuneration in the labour market for Africans and Indians than for individuals of other ethnicities taken as a whole. While the larger portion of the earnings differentials generally appears to be explained by ethnic differences in characteristics valued by the labour market, Africans and Indians would benefit substantially if they were to receive the same rates of remuneration for their educational endowments as workers of other ethnicities in the Trinidad and Tobago labour market. Notwithstanding Indians’ lowest average earnings, Africans appear more likely to be discriminated against.     

Who Benefits from Higher Education in Low- and Middle-Income Countries?

In this article, we investigate how higher education contributes to the employment and earnings of individuals in labour markets, and whether social origins play a role in the financial benefits from higher education. We focus on these questions in nine low- and middle-income countries: Armenia, Bolivia, Colombia, Georgia, Ghana, Kenya, Laos, Macedonia, and Vietnam. We use the recent Skills Towards Employability and Productivity (STEP) surveys of urban labour force participants to examine individuals’ educational attainment, labour market participation, and earnings. Using logistic regressions, we find that individuals from disadvantaged origins are less likely to obtain a higher education degree. We find that in most of these countries, individuals who have earned a higher education degree are significantly more likely to be in the labour force and find employment, and enjoy sizable earnings premia. The findings are fairly robust with regard to the samples of individuals examined, and the methods used to measure earnings premia. Finally, we find little evidence that the earnings premia from higher education vary by social origins or the likelihood of an individual completing a degree. These results suggest that the benefits from higher education are comparable for individuals from disadvantaged and advantaged social origins.     

Wage determination in Brazil: The growth of union bargaining power and informal employment

This article examines wage determination in Brazilian manufacturing during the 1980s and early 1990s. It presents evidence to show that the reduction in state regulation of collective bargaining has led to the development of a system of wage determination which is increasingly characterised by rent sharing and insider trade union bargaining power. Real wages appear increasingly inflexible with respect to movements in open unemployment, with a large informal sector disciplining formal sector wage bargaining and cushioning the impact of broader labour market conditions. An important consequence of this is that the employment costs of a successful counter‐inflationary strategy may be very severe.     

Adjustment,stabilisation and the structure of employment in Brazil

A significant change in the structure of employment in Brazil in the period 1988–95 took place. Industrial employment fell, especially in the most traditional sectors such as clothing, textiles and footwear. There has been a shift of workers from the industrial sector to the services sector and an increase in the share of self‐employed workers and informal wage earners. The quality of jobs being created in the services sector are not of the same ‘quality’ as those in the industrial sector, leading to a deterioration of employment conditions and of the labour market performance. Hence the rate of unemployment is not a very good measure of labour market conditions during adjustment. The creation of jobs in general might therefore not be an explicit target under adjustment. Rather the objective should be trying to change labour market institutions in order to improve the quality of the jobs and the quality of the labour relations.     

Agrarian reform and seasonal employment in coastal Peruvian agriculture

This article attempts (i) to estimate intra‐year casual labour supply functions (ICLSF) for single field tasks to selected agricultural production cooperatives in Northern Peru; (ii) to explain the marked seasonal variation in wage rates paid by these cooperatives to casual workers; (iii) to evaluate the relevance of minimum wage legislation for casual labourers on these enterprises, and (iv) to assess the degree of labour market integration both within and between production cooperatives. Two types of labour supply function were identified: (a) perfectly elastic at the minimum wage, and (b) kinked ICLSF. Wage rates set in the cooperative's external labour market affect wage determination in its internal labour market. The casual labour markets in two valleys were found to be poorly integrated.     

Sex differences in earnings: An analysis of Malaysian wage data

The conventional human capital earnings function is applied to a rich set of Malaysian wage data in an attempt to determine the origins of sex differences in average earnings. Several findings are of interest, the first being that the relationships estimated from the earnings function are similar to those typically reported for non‐LDCs. Second, less than a third of the average monthly wage difference between the sexes of about 34 per cent appears to be the consequence of either females having lower (measured) productivity than males, or females receiving lower rates of return to human capital than males. The major part of the earnings difference is apparently a consequence of employment distributions: females are much more likely to be in the low‐paying occupations.     

Gender wage inequality and export‐led growth in South Korea

This article investigates the relationship between gender, wage inequality, and export‐led growth in South Korea. The persistent gender wage gap in Korea's manufacturing sector is found to be linked to women's segregation in the country's major export industries where real wage growth has lagged productivity growth, despite favorable market conditions that might drive up women's wages relative to those of men. The interaction of state‐ and firm‐level hiring, training, and promotion practices that structure women's and men's employment opportunities differently appear to have resulted in a relatively weaker fall‐back position for women in labour markets. Econometric results are consistent with the hypothesis that women's weaker fall‐back position limits their ability to bargain for wage increases commensurate with productivity growth. Further, evidence is presented which links gender wage inequality to the growth of Korean exports.     

Self-employment earnings and returns to education in rural Peru

This article estimates the returns to education for households who derive part of their income from household based non-farm self-employment ventures in rural Peru. While education is an individual level variable, earnings are observed at the household level. This asymmetry complicates both the estimation and the interpretation of the returns to education. This article is the first jointly to incorporate three channels through which education affects household earnings. Education affects earnings through the marginal productivity of labour (worker effect), labour allocation across activities (between-activity allocative effect) and its production externality effect (spillover effect). The results suggest that the between-activity allocative effects of education dominate the returns. This article also makes novel use of economic geography to proxy for the role that access to markets plays in determining these returns. In particular, altitude is a strong predictor of activity choice and the returns to education in this mountainous country.     

Wage – labour activities by agricultural households in Nicaragua

This article considers wage?–?labour activities by agricultural households in Nicaragua. It analyses the role of: (1) comparative advantage as determined by individual and household characteristics; and (2) agricultural conditions and market imperfections, in shaping wage?–?labour supply. An econometric specification is developed which allows for random household-specific effects. Results reveal that non-agricultural wage work is largely determined by comparative advantages, whereas agricultural wage work is used to deal with a number of agricultural conditions and market imperfections.     

The Intergenerational Effects of Political Influence: Evidence from China

This paper considers the effects of fathers’ political influence on their offspring’s labour market outcomes in China. Political influence refers to the ability to convert political power into economic benefits. This study identifies the dissolution of political influence by exploiting an age-based mandatory retirement rule in urban China. It exploits the variation of political influence in three dimensions: bureaucrat status, retirement status, and offspring gender. A difference-in-differences approach shows that the retirement of a bureaucrat translates into a 13 per cent decrease in offspring’s income. A triple-differences approach suggests retirement of a bureaucrat father translates into a 27 per cent decrease in earnings among sons. Retirement of a bureaucrat father is associated with larger income losses for offspring working in the same industry sector as their father and in industries that have a high concentration of assets or that are controlled by the state. This paper adds evidence to the growing literature estimating the economic benefits of political connections.