9 The second explanation revolves around institutional changes such as reductions in the minimum wage, the decreasing strength of trade unions and the declining share of state-owned enterprises. The existence of a binding minimum wage, for example, truncates the lower end of the wage distribution. As the minimum wage is allowed to erode away, say through inflation, it becomes less binding by moving further down the low end of the wage distribution, with the result that, _ceteris paribus,_ a higher share of wages will lie below the previous minimum wage level. That translates into an increased dispersion in wages and earnings. Similarly, strong trade unions have often been found to exert an egalitarian effect on the wage distribution, while at the same time commanding a wage premium for union members. Any waning of union strength, as happened in the United States over the last two decades, therefore would contribute to an increase in wage dispersion. A review of institutional developments in the Mexican labor market by Hemrndez et al (1998) showed that these factors may have contributed to a higher wage dispersion. Most important in this regard was the apparent decline in union strength, in part due to the privatization of public enterprises during the early 1990s. That review also showed that the real decline of minimum wages since the early 1980s may have had an impact as well, but mainly confined to wages in the primary sector.

Perhaps the most persuasive explanation, both for the United States and Mexico, is that which links earnings inequality to skill-biased technological changes that raise the relative demand for higher-skilled labor. According to the typology used by Johnson (1997), the type of technological change that drives up the wages of more highly skilled workers and drives down those of less skilled workers -- as occurred in both the United States and Mexico -- is extensive skill-biased technological change. Under this type of technological change, skilled workers become more efficient in jobs that were traditionally performed by unskilled workers. A demand/supply analysis in Hernandez et al (1998) provides support for this explanation in the case of Mexico: it showed that secular changes in demand for workers differentiated by education level were the dominant force behind recent adjustments in the Mexican labor market, with the market for more educated workers dominated by intra-sectoral increases in demand, and for less educated workers by intra-sectoral decreases in demand, independent of gender and experience. That outcome suggests that the rise in wage dispersion originates from changes in the intra-sectoral production structure, which favors educated versus uneducated workers, rather than from changing trade patterns, which would affect the demand for labor differently across sectors.8

# C. Some Background Facts on Education Spending

Mexico's overall spending on education, as a share of GDP, is slightly above the OECD average and compares favorably with education spending levels in other developing countries. Total spending per student in Mexico increased steeply in the second half of the 1980s and early 1990s, even though the total student population increased, from 24 million in 1985 to 27 mnillion in 1995. Part of this increase reflects a sThese findings correlate with earlier findings for Mexico (Cragg and Epelbaum, 1994) as well as for Chile, following its trade liberalization program (Robbins, 1994).