composition effect influences overall school dropout rates by increasing the proportion of youth that are exposed to risks related to adolescence and unexpected income shocks, and that live in households with fewer means to address them. Furthermore, as explained by Murane (2013), lower incomes are usually associated with higher rates of time preference, and therefore, lower incentives to invest in longer term ventures such as the accumulation of human capital.

The analysis of household survey data confirms that the share of individuals in the bottom four deciles attending LS increased in many countries since 1990. At the regional level 31, 40, and 52 percent of individuals of LS age in these deciles attended LS around 1990, 2000 and 2010, which implies a substantial expansion of access (Table 4).<sup>25</sup> These trends suggest that there was a considerable expansion in the demand for USE services by lower income youth from 2000-2010. The extent to which these changes affect USE dropout will depend on education systems’ capacity for absorbing larger groups of more vulnerable populations over time.

As shown by di Gropello (2006), the average cost per student in LA at the secondary level is 41 percent higher than the cost per student in primary, so the absorption capacity will depend on the extent to which countries are able to expand, or shift resources across schooling levels in favor of expanding USE, and on additional financing available for increasing service supply.<sup>26</sup> For example, one short term response can be to expand supply by increasing class sizes and using existing infrastructure. While this can initially enable higher enrollment, larger class sizes can be one of the influences reducing school quality and impact the expected returns to education, which can eventually reduce USE completion rates.<sup>27</sup> Thus, in the medium and longer run the capacity of USE to absorb the growing demand will also depend on the extent to which services can be expanded and adapted to new entrants’ characteristics, which is a question to verify empirically.<sup>28</sup>

# **3.2 Macroeconomic and labor market environment**

Two aspects of the region’s macroeconomic environment that are also likely to influence school attendance decisions at USE ages are the greater income growth rates and higher economic stability during the 2000s. On one hand, higher income and wage levels would be expected to increase

> 25We report averages for the 3 years before and after 1990, 2000 and 2010 respectively since the availability of data differs by country. Table 4 uses household survey data to document this by reporting the share of individuals belonging to households in the bottom four deciles of the income distribution in each country and year, that are of LS age and that actually attended LS.

> 26 The political economy aspects financing the expansion of USE in this context are examined by Poterba (1998). 27 There is some controversy about the importance of class sizes (e.g., Hanuschek (1995), Kremer (1995), Hanuschek and Woessmann (2010) ). Two papers with evidence on the negative effect of class size on attainment are Angrist and Lavy (1999) and Krueger (1999).  Lazear (1999) argues about why in equilibrium students may be selected so that true inverse effects of class size on student achievement are difficult to discern.

> 28Bassi, Busso, and Muñoz (2013) argue that increased public spending in education in LA led to a considerable expansion in services and coverage responsible to a large extent for the greater school enrollment in the region. They find that increased demand for education from higher LS graduation rates was absorbed by the expansion in the supply of USE services. Di Gropello (2006) estimates that the average magnitude of resources in LA and Asian countries that is needed for addressing greater USE demand currently is around 1.9 points of GDP, illustrating the magnitude of the challenge faced by the countries in the region.

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