A decomposition method to evaluate the "paradox of progress", with evidence for Argentina

Abstract

The ‘paradox of progess’ is an empirical regularity that associates more education with larger income inequality. Two driving and competing factors behind this phenomenon are the convexity of the ‘Mincer equation’ (that links wages and edcuation) and the heterogeneity in its returns, as captured by quantile regressions. We propose a joint least-squares / quantile regression statistical framework to derive a decomposition to evaluate the relative contribution of each explanation, based on a ‘functional derivative’ as in Firpo et al. (2009). We apply the proposed decomposition strategy to the case of Argentina.