“Convexification” and “deconvexification” of the Peruvian wage profile: a tale of declining education quality

Peruvian average wage profile with respect to schooling is convex. Returns to higher education are around nine percentage points larger than returns to basic education. We explore two possible explanations for this phenomenon: a composition effect driven by differences in individual ability and heterogeneous education quality. We use the theoretical models developed in Card (1994) and Card and Krueger (1996) to analyze the effects that individual ability and education quality can have on the observed relationship between wages and schooling. We test the implications of these models using Peruvian data from a novel survey that includes measures of cognitive skills. We do not find evidence of increasing returns by ability. Instead, empirical results are consistent with the predictions of a model of endogenous schooling with heterogeneous education quality. Evidence suggests that the Peruvian convex wage schedule is the result of two superimposed wage profiles: one corresponding to a low quality basic education system and, the other, to a higher education system with better quality. Declining education quality at basic and higher education, thus, appear to have a role when explaining the “convexification” and recent “deconvexification” of the wage profile, respectively.