5 formal education appears to have acted as a signal for innate ability rather than provided human capital. Experience-earnings profiles appear to converge, albeit slowly, after initial hiring. However by 1998 there appears to have been a shift in the way the labor market functions, with education having more inherent productivity-enhancing value.<sup>4</sup> Tables 3 and 4 report rates of return to additional years of education and experience respectively, for each year at the mean (OLS) and for each conditional quintile. Marginal rates of return are calculated for levels of education and experience spread across the sample range. The estimates reveal that rates of return to additional years of education are much higher at already high levels of education. So for example an additional year of education for someone with only 2 years of formal education will yield a 12 to 13 percent increase in earnings at the mean in 1988, a 10 to 11 percent increase in 1992 and only a 7 to 8 percent increase in 1998. By contrast at the higher levels of initial education the rates of return to additional education are much higher: 23 to 24 percent at the mean in 1988, 20 to 22 percent in 1992 and rising to 26 percent in 1998. Clearly education to college level has become significantly more valuable in the labor market by the late 1990s. The “stretching out” of returns at the top end of the distribution, and at the top of the range of education and experience arises because of the change in the sign of the interaction effect between the two, indicative of a move from non-competitive screening behavior for more highly paid jobs, to a genuinely competitive labor market in which education is rewarded because of its association with productivity.

Table 3 also reveals that rates of return to an additional year of education are between 4 and 7 percentage points higher at the 90<sup>th</sup> quintile compared to the 10<sup>th</sup> . If this fact is combined with the change over time in the marginal rate of return to education, it makes for growing inequality in the returns to education and points to a very important force for greater earnings inequality. However set against this we must also note, from Table 1, that average levels of education in the male population have been rising over the period in question. An increased supply of educated workers does not appear to have compressed earnings. Rather the increase in demand for skills appears to have outstripped the increase in supply, with the effect that the price has risen. The Brazilian economy appears, in the mid 1990s, to have moved from one in which at the top of the earnings distribution, education is used to signal inherent ability to one where education has become genuinely productive.

Table 4 shows how marginal rates of return to experience change over the sample range. There are three features to the Table. Firstly rates of return fall sharply as experience increases – an indication of the quantitative importance of the statistically significant squared term in experience in all the reported regressions. Between 30 and 40 years of accumulated experience additional experience starts to attract a negative rate of return, albeit a very small one. Secondly there is a progressive, though again small, decline in the marginal return to experience over time, particularly between 1988 and 1992. So for example a man in with 11 years of education and 10 years of experience at the median of the earnings distribution saw the marginal return to the 11<sup>th</sup> year of experience fall from 5.3 percent to 4.2 percent between 1988 and 1992. At the lower quintiles the fall appears to have persisted beyond 1992. This may be indicative of rapid change in the economy, as new skills become important and experience less so. Thirdly a marginal gain in experience is more highly rewarded at the top of the earnings distribution compared to the bottom. So for example a man with 11 years of 4 1998 does not appear to be an “rogue” observation in this respect. We find identically signed and sized coefficients using data from the 1997 PNAD.