of not working generally increases. In addition, children behind their peers in grade achievement may become discouraged and drop out. Also, high transaction costs of entering and exiting schooling may preclude or delay re-entry of dropouts. Therefore, the more stable macro environment would be expected to positively affect school enrollment.<sup>31</sup> With respect to the labor market, there are at least two direct channels through which conditions could influence school enrollment decisions. First, relevant wage levels can cause two types of reactions: i) if the reference wage for USE age youth –the wages to which close age groups have access- increases, so do the opportunity costs of remaining in school and incentives for substituting school time for paid work (negatively affecting school attendance), and ii) higher wages also imply greater household resources, which have a positive income effect on enrollment. The size of both effects in the same household will depend on characteristics and preferences shaped by their socioeconomic status, cultural patterns, expected probabilities of graduation, etc.<sup>32</sup> Second, the probability of accessing the prevalent market wage will depend on employment opportunities. In a tight labor market with high unemployment and low employment generation, the opportunity cost of remaining in school will be lower, leading to smaller substitution and income effects. Similarly, more stable or higher quality jobs will increase the opportunity cost of remaining in school, but can also make income effects stronger, with an ambiguous final effect.

According to the data from our household surveys, higher average wages, greater employment, and greater levels of formality that are associated with higher quality jobs prevailed on average in LA during the 2000s compared with the 1990s. The evolution of real mean wages for 25 to 45 year old individuals –which can be taken as a relevant comparison group for USE age individualsacross the region reveals that increases were much higher in the 2000s, when annual growth rates of close to 2 percent were observed, as compared to the 1990s, with increases of about 0.4 percent yearly (Figure 8). In Argentina, Chile, Colombia and the Dominican Republic, increases in the wage rate were particularly high; Bolivia, Brazil, El Salvador and Guatemala are the four countries where average wages declined over time (Table A.8).<sup>33</sup> Furthermore, employment rates among 25 to 45 year olds in the region increased steadily –with a minor fall in 2004- and faster towards the last part of the 2000s. Thus, in general, the probability of having access to higher labor market remunerations for relatively young age groups increased (Figure 8). Argentina, Mexico, Nicaragua, and Uruguay are the countries with greater increases in effective access to the labor market (Table A.8). Especially after 2005, higher wages, greater

> 31 For shocks effects on schooling investment due to liquidity constraints and absence of insurance see Chiu (1998), Duryea, Lam and Levinson (2007), Flug, et. al. (1996), Jacoby and Skoufias (1997), (2009), Mendoza (2009), Ramesh (2009), Mehrotra (2009), Keane (2009), Friedman and Levinsohn (2002), and Shang and Wu (2003), 32 Duryea and Arends-Kuenning (2003) for instance, find that in Brazil substitution effects prevailed for 14-16 year olds when labor market conditions improved, resulting in higher school dropout. Edmonds, et.al. (2010), however find in India that income effects prevailed during the period of trade liberalization, due to the relation between increased household resources and higher school enrollment.

> 33 Data on wages are from household survey data set, adjusted for purchasing power parity at constant 1995 prices. Data on employment also obtained from household surveys.

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