13 Two phenomena about the private rates of return draw attention in Table 5: the first is that the overall rate of return to education has increased between 1984 and 1994, as seen from the "Mincerian" rates of return. This is a direct consequence of the increased dispersion in wages that took place over that period. Secondly, the rates of return for different levels of schooling have changed in ranking. In 1984, the lower levels of education uniformly yielded greater rates of return than investments in higher levels of education. This ranking is completely reversed in 1994, with the private rates of return to primary education declining significantly below the rates of return to higher education, which almost doubled."<sup>1</sup>

**Table** 6: **Social Rates of** Return to Schooling in Mexico

||Wage E|arners|Monetary Inco|me Recipients|
|---|---|---|---|---|
|_Schooling Level_|**1984**|**1994**|**1984**|**1994**|
|l-priinarycomplete|_15.5%_|11.3%|<br>13.7%|11.8%|
|2 - secondary complete|12.4%|13.0%|<br>13.1%|12.7%|
|3 - preparatory complete|12.9%|13.2%|<br>12.2%|14.4%|
|44-university and above|7.6%|13.2%|<br>9.6%|13.9%|

Source: Tables Aland A2, using the method described in the Annex.

As in the case of the private rates of return, the social rates in Table 6 also indicate a decline in the rate of return for primary education and increases in the rates of returns for higher education during the decade between 1984 and 1994. A noteworthy difference to the private rates of return, however, is that the social rates of return exhibit a much lower dispersion across schooling levels in 1994 than in 1984. That is, the social rates of return associated with different investments are much closer together, which, in a standard capital market context, suggests a decline in market segmentation and, thus, a more efficient allocation of investment resources in education.

# E. A **Policy Dilemma**

A general efficiency criterion for investing is that resources should be first invested in those activities that yield the highest rate of return until the point where the marginal rate of return drops to the level of the activity with the next highest rate of return. Barring any corner solutions and assuming that investments in education exhibit decreasing marginal rates of return, this rule will have the effect of equating rates of return across different activities. Suppose that the government were following this efficiency rule in its allocation of public resources in education in the face of increased wage dispersion. As shown in the Annex, that would mean that the pattern of public spending in education would have to adjust in the same direction as the private rates of " Theprivate rates of return in Table 5 pertaining to 1984 are very similar to the private rates reported for Mexico in Psacharopoulos (1994a). The main difference arises with regard to primary education, where his paper reports a significantly higher return. The reason is because Psacharopouloa **s** sumes that the foregon **e** arnings from attending primary school are roughly half the figure used in our calculations, which are based on Annex Table A3. Psacharopoulos' lower assumption is mean **t** o adjust for the very low opportunity cost of young children attending primary school.