External Returns to Higher Education in Mexico 2000-2010

This paper estimates the external returns to higher education in Mexico using cross-sectional micro data from the 2000 and 2010 censuses’ samples. Because of identification problems, which according to the literature are the main challenge in this kind of model, an instrumental variable approach is used, taking the demographic structure as an instrument for the share of college graduates in a Metropolitan Area (MA). Results indicate that a one percentage point increase in the share of college graduates in Mexico increases the regression-adjusted average wages of an MA in more than six percent over a 10-year period. The constant composition approach is used to assess whether these effects are mainly due to externalities or to supply movements along a downward sloping demand. Part of the external returns to a higher share of college graduates is the result of externalities from direct or indirect interaction with these individuals. There appears to be heterogeneity in the magnitude of the spillovers according to educational level.