Declining Inequality in Latin America: Labor Markets & Redistributive

Policies

Nora LustigTulane University

New Challenges for Growth and Productivity

The Growth Dialogue – G24

Washington, DC -- September 25, 2013 1

Inequality in Latin America is high… …but declining since around 2000Decline is pervasive and significant• Larger than the rise in inequality in 1990s• Important contribution to the decline in

poverty• In countries with high growth & low growth• In countries with left and nonleft

governments• In commodity exporters and importers 2

LATAM IS THE MOST UNEQUAL REGION IN THE WORLD

Gini Coefficient by Region (in %), 2004 (Ferreira and Ravallion, 2008)

32.233.6

38.9 38.9 39.1

44.7

53.2

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

High Income Europe andCentral Asia

South Asia North Africaand the

Middle East

East Asia andthe Pacific

Sub-SaharanAfrica

Latin Americaand the

Caribbean

Gin

i coe

ffici

ent

3

Latin America: Declining income inequality by country: 2000-2011

(Annual Change of Gini in %)

Nic

arag

ua

Boliv

ia

Ecua

dor

Arge

ntin

a El

Salv

ador

Mex

ico

Vene

zuel

a

Braz

il

Peru

Dom

. Re

p.

Pana

ma

Chile

Cost

a Ri

ca

Para

guay

Uru

guay

Guat

emal

a

Hond

uras

LAC-

17

Chin

a

Sout

h Af

rica

Indi

a

USA

0.00

0.50

1.00

1.50

2.00

2.50

3.00

-2.635-2.051-1.989-1.297-1.237-1.166-1.068 -1.03 -0.912-0.793-0.742-0.724-0.468-0.386-0.196-0.096

0.609

-0.952

2.116

0.82 0.767

0.401

4

Decomposing the change in poverty in the 2000s: growth vs. redistribution

(Datt-Ravallion Decomp Method)

-6.2 -12.4 -12.3

-4.8 -6.6 -12.1 -7.8 -6.1

-12.6 -10.7 -6.2

-60%

-10%

40%

90%

140%

Argentina Bolivia Brazil Chile Costa Rica Ecuador Honduras Mexico Panama Peru Paraguay

Growth Redistribution Change in poverty ($2.5 a day) during the 2000s*

5

• Determinants:–Declining inequality of hourly labor

income–Larger and more progressive

transfers–Lower dependency ratios

6

Decomposing Decline in InequalityLabor (red); Transfers (Green); Demog

(Blue) (Azevedo et al. 2012)

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Argenna

BrazilChile

Colombia

CostaRica

Dominican Rep.

Ecuador

El Salvador

Honduras

Mexico

Panama

ParaguayPeru

Uruguay

LAC-14

7

Determinants of declining inequality in hourly labor earnings:

Decline in returns to post-secondary education (aka. skill premium)

•Supply•Demand•Pro-active Labor Policies•Degraded tertiary

8

Argentina, Brazil and Mexico• Argentina:

– High growth due to post-2002 recovery– Devaluation in early 2000s => increase in relative demand of low-skilled

workers – Very pro-active labor market policies

• Brazil: – Low growth during most of the period – Increase in relative supply of skilled workers– Increase in relative demand of low-skilled workers– Pro-active labor market policies

• Mexico: – low growth – Increase in relative supply of skilled workers– No pro-active labor market policies

9

How redistributive are Latin American governments?

• Decomposition of changes in inequality by income source show that transfers is, on average, the second most important proximate determinant of decline in overall inequality

• Benefit and tax incidence analysis for 11 countries

• www.commitmentoequity.org

10

Inequality Reduction: Brazil, Mexico, Peru and Uruguay (2009)

(Taxes and Social Spending)

Market Income Net Market Income Disposable Income Post-Fiscal Income Final Income0.36

0.41

0.46

0.51

0.56

0.579

0.565

0.544 0.546

0.439

0.511

0.4970.488

0.481

0.429

0.5040.498

0.494 0.492

0.466

0.492

0.478

0.457 0.459

0.393

Brazil (2009)Mexico (2010)Peru (2009)Uruguay (2009)

11

Inequality Reduction: Mexico 1996 vs. 2010

(Impact of Social Spending)

12

Mexico still less redistributive than peers

13

0.350

0.400

0.450

0.500

0.550

0.600

Net MarketIncome

DisposableIncome

Post-FiscalIncome

FinalIncome

Brazil (2009)

Mexico (2010)

Uruguay (2009)

Poverty Reduction: Brazil, Mexico, Peru and Uruguay (Income Taxes, Cash Transfers and Consumption

Taxes; Poverty line US$2.50 ppp/day)

14Net Market Income Disposable Income Post-Fiscal Income0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Brazil (2009)Mexico (2010)Peru (2009)Uruguay (2009)

Inequality Reduction by Direct Taxes and Transfers: Brazil, Europe and US

• Direct taxes and transfers reduce inequality by 7.0 percentage points in US & 3.9 percentage points in Brazil

Braz

il

Gree

ceU

nite

d St

ates

Italy

Port

ugal

Spai

n

Net

herla

nds

Fran

ce

Aust

ria

Germ

any

Swed

en

Luxe

mbo

urg

Belg

ium UK

Finl

and

Denm

ark

Irela

nd

0

Source: authors’ calculations for Brazil and US; Immervoll et al. (2009) for Europe

15

How should we measure inequality to monitor how equitable societies are?

Two points:• Regardless of the measure of choice=> before/after

government taxes and transfers• Data:

– Household surveys a good source mainly for labor income and government transfers

– But rich are not captured; use tax returns as suggested by Top Incomes Project (Alvaredo, Atkinson, Piketty, Saez)

16

FIGURE 3Top 1% income share in Colombia, 1993-2010

Source: Table A4.

10,0

12,0

14,0

16,0

18,0

20,0

22,0

24,0

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Inco

me

shar

e (%

)

Top 1%

17

Commitment to Equity (CEQ), joint project of Tulane University and Inter-American Dialogue.

www.commitmentoequity.org

18

References• Alvaredo, Facundo and Juliana Londoño (2013) “High Incomes and Personal Taxation in

a Developing Economy: Colombia 1993-2010,” CEQ Working Paper No. 12, March. • Azevedo, J. P., G. Inchauste, and V. Sanfelice (2012) “Decomposing the Recent Inequality

Decline in Latin America”, Mimeo, The World Bank.• Campos, Raymundo, Gerardo Esquivel and Nora Lustig (2013) ´The Rise and Fall of

Income Inequality in Mexico, 1989–2010,” in Giovanni Andrea Cornia (editor), title not yet specified, Oxford University Press, forthcoming.

• Gasparini, L., S. Galiani, G. Cruces, and P. Acosta (2011) “Educational Upgrading and Returns to Skills in Latin America. Evidence from a Supply-Demand Framework,

• Higgins, S., N. Lustig, W. Ruble and T. Smeeding. “Comparing Taxation, Transfers, and Redistribution in Brazil and the United States,” paper presented at the IARIW Conference, Rio, Brazil, September 13, 2013.

• Lustig, N., L.F. Lopez-Calva and E. Ortiz (2013) “Declining Inequality in Latin America in the 2000s: The Cases of Argentina, Brazil, and Mexico,” World Development, Vol. 44, 129-141.

• Lustig, Nora and Carola Pessino (2014) “Social Spending and Income Redistribution in Argentina in the 2000s: the Rising Role of Noncontributory Pensions,” Public Finance Review.

• Lustig, Nora et. al. (2013)“The Impact of Taxes and Social Spending on Inequality and Poverty in Argentina, Bolivia, Brazil, Mexico, Peru and Uruguay: an Overview,” CEQ Working Paper No. 13.

19

References for Incidence Analysis Argentina: Lustig, Nora, Luis F. Lopez-Calva and Eduardo Ortiz-Juarez (2013) ´Deconstructing the Decline in Inequality in Latin America,´ chapter for Essays in Honor of Enrique IglesiasBrazil: Higgins, Sean and Claudiney Pereira. 2014. The Effects of Brazil’s High Taxation and Social Spending on the Distribution of Household Income. Forthcoming in Lustig, Nora, Carola Pessino, and John Scott, Eds. “Fiscal Policy, Poverty and Redistribution in Latin America,” Public Finance Review. Mexico: Scott, John. 2014. Redistributive Impact and Efficiency of Mexico’s Fiscal System. Forthcoming in Lustig, Nora, Carola Pessino, and John Scott, Eds. “Fiscal Policy, Poverty and Redistribution in Latin America,” Public Finance Review. Peru: Jaramillo, Miguel. 2014. The Incidence of Social Spending and Taxes in Peru. Forthcoming in Lustig, Nora, Carola Pessino, and John Scott, Eds. “Fiscal Policy, Poverty and Redistribution in Latin America,” Public Finance Review. Uruguay: Bucheli, Marisa, Nora Lustig, Máximo Rossi, and Florencia Amábile. 2014. Social Spending, Taxes, and Income Redistribution in Uruguay. Forthcoming in Lustig, Nora, Carola Pessino, and John Scott, Eds. “Fiscal Policy, Poverty and Redistribution in Latin America,” Public Finance Review.

Slide 5:Lopez-Calva, L., N. Lustig, J. Scott and A. Castaneda. Gasto social, redistribución del ingreso y reducción de la pobreza en México: 1996 y 2010. Book chapter (in-progress)For more on Commitment to Equity (CEQ) visit www.commitmentoequity.org

20

Thank you!

21