Schooling Inequality, Returns to Schooling, and Earnings Inequality: Evidence from Brazil and South Africa

David Lam, University of Michigan
Nicola Branson, University of Cape Town
Murray Leibbrandt, University of Cape Town

Human capital models imply that both the distribution of education and returns to education affect earnings inequality. Decomposition of these “quantity” and “price” components have been important in understanding changes in earnings inequality. Most previous literature does not consider the case in which returns to schooling differ by schooling level. We show theoretically that increases in returns to schooling at low levels of schooling tend to be equalizing, while increases in returns to high levels of schooling tend to be disequalizing. We apply these analytical results to Brazil and South Africa. Both countries have high earnings inequality, and both have experienced changes in returns to schooling that differ by schooling level. While both countries have had declines in schooling inequality, only Brazil has translated those into declines in earnings inequality. In South Africa, rising returns to schooling at the top have offset equalizing changes in the schooling distribution.