February 2010

IZA DP No. 4753: Returns to Education and Macroeconomic Shocks: Evidence from Argentina

Returns to schooling in urban Argentina increased from 1992 to 2003, a period of economic reforms and macroeconomic volatility. In this paper I provide the most consistent estimates of returns to education so far, while I also investigate earnings profiles over time. This paper contributes to the existing literature by employing a variety of methodologies in order to estimate these returns and by using macroeconomic time series to explore shifts in earnings. The pattern of the increasing returns to education changes after the 2001 crisis. Until then, increasing convexity in the earnings-education profile reflects increasing or stable earnings for college graduates combined with decreasing earnings for the less educated. After the crisis, the increasing premium to education results from wages falling at a faster pace for the less educated than for college graduates. This result is robust to endogenous supply responses, selection, specification, changes in the functional form and to the inclusion of household fixed effects. I also find that rates of return to education are upward biased by up to 20 per cent by the omission of unobserved family background factors (i.e. family fixed effects). Surprisingly, after controlling for macroeconomic variables I still find a statistically and economically significant downward trend for all earnings, particularly those of primary completers.