Decline of inequality in Latin America

Latin America has been historically characterized by high levels of inequality. Available statistics on both income and consumption inequality suggest that Latin America is one of the most unequal regions in the world. However, the last decade has witnessed a substantial reduction in income inequality in most countries of the region. The average level of the Gini index[1], the most commonly used measure of inequality, for household income per capita has experienced a decline from 0.530 in the late 1990s to 0.497 in the late 2000s.

Understanding the determinants of this decline in inequality is essential to determine whether the downward trend can be sustained over time and to learn about successful experiences. An effort towards this direction is made by Lustig, Lopez-Calva and Ortiz-Juarez (2012)[2], who present an analysis of the fall in income inequality in the three largest economies in terms of gross domestic product in the region: Argentina, Brazil and Mexico. The decline of inequality for the three countries is shown in the graph below[3].

Evolution of Gini index of household income per capita. c.1990-c.2010gini arg bra mex

                       Source: Lustig et al. (2012).

The authors, which provide an analysis based on multiple articles, focus on the role played by the following determinants of inequality: skill premium, i.e. the wage ratio between high and low-skilled workers, government transfers and institutional factors such as unionization and minimum wages. The analysis suggests that the main factors behind the decline of income inequality in these three economies are a fall in the skill premium and the expansion of more progressive government transfers.

In the three experiences, the decline in income inequality is explained by both a fall in labor and non-labor income inequality, the former being larger. As explained by the authors, a decline in labor income inequality can occur by an increase in employment or number of hours worked among low-income workers and by a change in the distribution of wages such that wages for low-income workers with respect to high-income workers increase. In turn, the change in the distribution of wages can be attributed to a change in the characteristics of workers (known as quantity effect), for example an increase in the education level of low-income workers, and to a change in the remuneration to those characteristics (known as price effect).

The relative importance of those factors varies in the three experiences. In Argentina, the decline in labor income inequality can be attributed to some extent to the expansion of employment associated with an important economic growth during last decade. In contrast, the expansion of employment did not play an important role in Mexico and Brazil, where the fall of income inequality happened in a period of modest economic growth. Regarding the distribution of wages, while the role of the quantity effect was not conclusive (Argentina and Brazil) or even unequalizing (Mexico), the price effect, and particularly the decline in returns to education constitutes an important common cause of the reduction in labor income inequality in the three economies. While in Argentina this decline in the skill premium is explained by a reduction in the demand for skilled workers and institutional factors such as an increase in minimum wages and unionization, in Brazil and Mexico it is mainly explained by a relative reduction in the supply of low-skilled workers, mainly due to an expansion of basic education since the 1990s.

Finally, the reduction in global inequality in the three countries is also explained by the decline in non-labor income inequality. The main cause behind this trend is the expansion of government transfers. An important contribution was made by the expansion of progressive cash transfers programs targeted to the poor, such as the well-known conditional cash transfers programs Jefes y Jefas (Argentina), Bolsa Família (Brazil) and Oportunidades (Mexico).

The recent trend in inequality in a region characterized by persistent high inequality seems promising. And particularly so when the experiences analyzed suggest that government policies have played an important role in the decline of inequality. Besides the intrinsic improvement in terms of fairness, the fall in inequality has also contributed to a large extent to the reduction of poverty in the region. However, there is still a lot to be done to improve equality in the region. Despite the recent reduction, inequality in Latin America is still far above that in other regions. In the late 2000s, average inequality in OECD-30 amounted to 0.309[4], which implies that inequality of household income per capita in Latin America, as measured by the Gini index, is still more than 60% higher than in developed countries.


[1] For a definition of the Gini index, see http://stats.oecd.org/glossary/detail.asp?ID=4842.

[2] Lustig, N. et al. Declining Inequality in Latin America in the 2000s: The Cases of Argentina, Brazil, and Mexico, World Development (2012), http://dx.doi.org/10.1016/j.worlddev.2012.09.013.

[3] The annual percentage change in the Gini index during the 2000s was: -1.07 for Brazil, -1.16 for Mexico and -1.23 for Argentina.

[4] Based on OECD statistics. Available at: http://stats.oecd.org.

Advertisements
This entry was posted in Inequality, Poverty. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s