The Labor Market Effects of an Educational Expansion. A Theoretical Model with Applications to Brazil

Abstract

Most countries are rapidly increasing the educational attainment of their workforce. This paper develops a novel framework to study, theoretically and empirically, the effects of an educational expansion on the occupational structure of employment and distinct aspects of the wage distribution—wage levels, wage gaps, and poverty and inequality indicators—with an application to Brazil. I proceed in three steps. First, I provide some stylized facts of the Brazilian economy between 1995 and 2014: A large educational expansion took place; the occupational structure of employment remained surprisingly fixed; workers of all educational groups—primary or less, secondary, and university—were increasingly employed in occupations of lower ranking as measured by average wages over the period; and wages of primary educated workers increased while wages of more educated workers declined, bring- ing forth reductions in poverty and inequality. Second, I build a model that traces these heterogeneous patterns of occupations and wages to the educational expansion. The model assigns workers with three levels of education to a continuum of occupations that vary in complexity and are combined to produce a final good. I investigate three different policy experiments: An increase in university level, an increase in secondary level, and a simultane- ous increase in both. The predicted effects depend on the policy analyzed. Considering the educational expansion that took place in Brazil (simultaneous increases in university and secondary levels), the model predicts qualitatively all the observed labor market changes in the occupational structure of employment and the wage distribution. Finally, I calibrate the model with the data from 1995 and show that, through its lens, the observed educational expansion in Brazil explains 66 percent of the occupational downgrading and around 80 per- cent of the changes in wage levels, inequality, and poverty during the period of 1995-2014.