184 M. Binder Economics of Education Review 18 1999 183–199
school, enrollment rates more than doubled from 22 per cent to 46 per cent between 1970 and 1980, and then
rose more slowly to 55 per cent by 1990.
2
Fig. 1 shows the steep rise and subsequent flattening of secondary
enrollment rates. Post-secondary schooling rose even more modestly, from 14 per cent in 1980 to 15 per cent
in 1990.
An analysis of time series data for the national and state levels for the 1976–77 through the 1993–94 school
years suggests that changes in the secondary enrollment rate—and other schooling indicators as well—can be
traced to the opposing forces of price and income effects associated with economic fluctuations. I find that at
higher levels of national income, the schooling indicators improve, but during economic upturns, when employ-
ment opportunities grow, children also tend to leave school. The response to economic conditions is evident
even at the primary school level, although it is much larger for higher schooling levels, and is relatively
stronger for vocational, as opposed to academic instruc- tion. During the 1980s, the positive effect on schooling
of falling opportunity costs was countered by declining income, yielding relatively stagnant enrollment rates.
National economic indicators have similar effects on state-level schooling indicators, although the response
appears to vary with the relative affluence of states. Urbanization proportion and sectoral economic structure
are also important determinants of state schooling out- comes.
The paper proceeds as follows: in the next two sec- tions I outline the human capital investment model and
review the results of similar studies undertaken in the United States and Great Britain. Sections 4 and 5 provide
a brief overview of the Mexican schooling system, describe the data sources, and develop the empirical
Fig. 1. Secondary enrollment rates. Source: World Bank
WorldData country data series, 1995.
2
Secondary schooling includes both lower grades 7–9 and upper grades 10–12 academic and vocational secondary edu-
cation.
implementation of the model. Sections 6 and 7 report the results at the national and state levels, respectively, and
Section 8 concludes.
2. The human capital framework
In the human capital model, schooling is treated as an ordinary investment decision made by weighing the
present value of future benefits against current costs. The benefits primarily consist of increased earnings, although
consumption benefits are also possible. Costs include direct outlays for tuition, transportation, books and
materials and the indirect or opportunity costs of fore- gone wages. The optimal investment occurs at the
schooling level for which the marginal benefit equals the marginal cost. If the cost of schooling rises, the optimal
schooling level declines, and vice versa. In the presence of imperfect capital markets that fail to supply human
capital loans because of collateral problems, families must internally finance schooling expenses Becker,
1964. Families are liquidity constrained if they cannot cover education expenses and have no access to school-
ing loans: their children will receive less than the optimal amount of schooling. In addition, the liquidity con-
straints will be more binding if income falls, as it did for a majority of Mexican families during the 1980s
Lustig, 1992.
Even with perfect markets for human capital loans, we would expect schooling to respond to income if students
and parents also derive consumption benefits from it. For example, families may send their children to school to
keep them off the streets and out of trouble, to keep them entertained, or for prestige and status Schultz, 1963.
The effect of an economic downturn on a schooling con- sumption decision is the same as the effect on a school-
ing investment decisions: lower wages will reduce the opportunity cost of schooling with a positive substi-
tution effect, and at the same time reduce family income a negative income effect.
The effects of business cycle fluctuations are not lim- ited to the cost side of the investment decision. In fact,
returns to schooling tend to rise during an economic downswing Kniesner et al., 1978. In addition, Mexico’s
economic environment in the 1980s involved a dramatic policy restructuring as well as economic contraction.
Over the decade Mexico embarked on a series of struc- tural reforms which liberalized trade, deregulated dom-
estic markets and privatized state owned enterprises Lustig, 1992; Aspe, 1993. These changes may have alt-
ered perceived returns to schooling, thereby raising or lowering the marginal benefit of schooling. In fact, the
earnings differential by schooling level appears to have widened Cragg and Epelbaum, 1996. In a survey of
295 parents of school children, 84 per cent reported that the restructuring made higher levels of schooling more
185 M. Binder Economics of Education Review 18 1999 183–199
important.
3
A positive relationship between an economic downturn and schooling should not then be interpreted
as a pure price effect, since it also may contain a positive response to the rate of return to schooling, especially in
the changing economic environment of Mexico in the 1980s.
3. Evidence from industrialized countries
