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    ABSTRACT: Research shows that education has played a crucial role in raising levels of earnings and that returns to education in Mexico have increased, particularly in higher education and in the upper tail of the conditional earnings distribution. The authors examine patterns of public spending on education in the face of further increases in earnings inequality. They analyze the incidence of benefits using two sets of data: data on unit costs per student by state and by education level, and data from surveys on household income and spending. Among their findings: Nationally, the poorest income groups get most of the national and state subsidy for primary education. At higher education levels the poor get progressively smaller subsidies. For all Mexico, government spending on primary education is very progressive. In lower secondary education it is neutral. And in upper secondary education it benefits mainly the middle and upper classes. Tertiary education is strongly regressive, benefiting mainly the richest deciles and mainly in urban areas. But those government patterns vary by region. In the central region average total spending is more uniformly distributed than the national pattern. In the northern region the subsidy is progressive. Primary education is neutral and higher levels of instruction are moderately regressive. In the central region primary schooling is very progressive, while lower secondary schooling is almost neutral. Upper secondary and tertiary instruction strongly benefit the richest income deciles. In the southern region basic (primary and lower secondary) education is very progressive, upper secondary education is neutral, and tertiary education is highly regressive. In Mexico City all levels of education except primary are stronglyregressive. The authors show that public spending at the tertiary level is more regressive than household spending. So much of public spending on tertiary education favors non-poor families in urban areas that to reallocate the spending so that poor students have a chance to participate would require developing credit markets for higher education. The government's role should be to help overcome market failures in the financial sector, which limit the availability of long-term financing for higher education. These failures can be corrected through student loan programs or means-tested financial aid and scholarship programs. Such programs are rarely devoid of subsidy but are preferable to the direct, cost-free provision of services because the subsidy is targeted more closely to the source of market failure.

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May 29, 2014