Friday, March 30, 2018

Why Education Doesn't Lead to Growth in Mexico

Santiago Levy, an economist who served in several capacities in the Mexican government, has a really interesting post at the Brookings Institution site about education and economic growth in Mexico. We would logically expect a more educated workforce to generate more growth but we don't see that in Mexico (and likely not in other Latin American countries as well).

The answer is informality.

The co-existence of heterogeneous firms in the same narrowly-defined market is one manifestation of widespread resource misallocation in Mexico. If somehow the hundreds of self-employed truck drivers could be grouped in a firm, the productivity of the transportation sector would increase and, critically, so would the demand for more educated workers. 
Many developing countries in Latin America have numerous small low productivity firms and many self-employed workers. In other words, they have large informal sectors and misallocation is a significant issue. While the specific factors that generate misallocation probably differ between countries, in each economy the phenomenon drives two undesirable outcomes: low productivity and depressed demand for more educated workers.

In Mexico there is a huge gap between the most productive and least productive firms. The most productive have educated workers doing accounting, engineering, web design, or whatever. The least productive are just one or a few people doing it on their own on a shoestring. They are not hiring educated workers.

In short, informality is a drag on economic growth, employment, and wages. And it remains widespread.


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