The recent decline of inequality in Latin America

Working Paper 2009-140

Abstract

Between 2000 and 2006, the Gini coefficient declined in 12 of the 17 Latin American countries for which data are available. Why has inequality declined? Have the changes in inequality been driven by market forces such as the demand and supply for labor with different skills? Or have governments become more redistributive than they used to be, and if so, why? This paper attempts to answer these questions by focusing on the determinants of inequality in four countries: Argentina, Brazil, Mexico and Peru. The analysis suggests that the decline in inequality is accounted for by two main factors: (i) a fall in the earnings gap between skilled and low-skilled workers (through both quantity and price effects); and (ii) more progressive government transfers (monetary and in-kind transfers). Demographic factors, such as a change in the proportion of adults (and working adults) per household, have been equalizing but the magnitude of their contribution has been small by comparison. In Brazil, Mexico and Peru, the fall in earnings gap, in turn, is mainly the result of the expansion of basic education over the last couple of decades, which reduced inequality in attainment and made the returns to education curve less steep. It also results from the petering out of the unequalizing effect of skill-biased technical change in the 1990s associated with the opening up of trade and investment. In Argentina, the decline in earnings inequality seems to be associated with government policies that without the windfall of high commodity prices will be hard to sustain.

Authors: Luis F. Lopez-Calva, Nora Lustig .