keynote address why did inequality decline in latin america? … · • lustig, n., l. f....

Keynote AddressWhy did Inequality Decline in Latin

America?Nora Lustig

Tulane UniversityNonresident Fellow CGD and IAD

REDI 3X3 WorkshopUnderstanding Inequality in South Africa Pretoria, South Africa, November 4, 2014

• Lustig, N., L. F. Lopez-Calva, E. Ortiz-Juarez. 2014.“Deconstructing the Decline in Inequality in LatinAmerica,” in Basu, Kaushik and Joseph Stiglitz, eds.Proceedings of IEA roundtable on Shared Prosperityand Growth, 2015, Palgrave-Macmillan

2

To cite material in this ppt please refer to:

OUTLINE• The facts

• Inequality, poverty reduction and the middle class

• Why has inequality declined?

– Labor markets

• Zooming in: Brazil

• Zooming in: Mexico

• Transfers and Inequality decline

3

THE FACTS

4

Inequality in Latin America is high…

…but has been declining since around 2000

• Decline is pervasive and significant

• Larger than the rise in inequality in 1990s

• Important contribution to the decline in poverty

• Contributed to the rise of the middle-class

5

LATAM IS THE MOST UNEQUAL REGION IN THE WORLD

Gini Coefficient by Region (in %), 2004

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 and

Central Asia

South Asia North Africa

and the

Middle East

East Asia and

the Pacific

Sub-Saharan

Africa

Latin America

and the

Caribbean

Gin

i c

oe

ffic

ien

t

6Ferreira and Ravallion, 2008.

Declining Inequality in 2000’s

• The Gini coefficient for household per capita income fell from a weighted (unweighted) average of 0.550 (0.532) in the early 2000s to 0.496 (0.483) circa 2012.

• On average, the decline equaled .86%/year

• The decline occurred in 16 of the 18 countries.

• The rate of decline ranged from an annual average of -2.64 percent in Nicaragua to -0.28 percent in Venezuela.

7

8

-2.64 -2.08 -1.68 -1.45 -1.28 -1.00 -0.92 -0.79 -0.74 -0.72 -0.70 -0.58 -0.50 -0.42 -0.40 -0.28

0.09 0.61

-0.86

2.61

1.02 0.74 0.69 0.64

-4.00

-3.00 -2.00

-1.00

0.00

1.00 2.00

3.00

Nicarag

ua

Bo

livia

Ecu

ad

or

El

Salv

ad

or

Arg

en

tin

a

Brazil

Peru

Do

m.

Rep

.

Pan

am

a

Ch

ile

Mexic

o

Uru

gu

ay

Co

lom

bia

Gu

atem

ala

Parag

uay

Ven

ezu

ela

Co

sta R

ica

Ho

nd

uras

LA

C-18

In

do

nesia

So

uth

Africa

Ch

ina

Ru

ssia

US

A

Average Yearly Change in Gini: 2000 (circa) -

2012 (circa)

9

0.42

0.44

0.46

0.48

0.50

0.52

0.54

0.56

0.58 1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Panel A: Weighted averages of the Gini coefficient; 18 countries

HH per capita income HH equivalized income

10

0.42

0.44

0.46

0.48

0.50

0.52

0.54

0.56

0.58 1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Panel B: Weighted averages of the Gini coefficient, excluding Mexico

HH per capita income HH equivalized income

The decline of income inequality in the 2000s has been higher that the rise in the 1990s(Change in Gini points in %)

8.3

-11.3

4.0

-15.4

3.7

-6.5

0.8

-4.7

2.9

-10.7

2.4

-4.5

1.6

-12.2

1.5

-4.6

0.7

-2.9

0.1

-8.5

4.2

-3.1

6.1

-4.1

3.0

-7.4

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

1992-2

002

2002-2

013

1997-2

000

2000-2

012

1985-2

001

2001-

2012

1992-1

998

1998-2

011

1995-2

001

2001-

2012

1989-2

000

2000-2

012

1993-2

001

2001-

2009

1989-2

001

2001-

2012

1997-2

003

2003-2

011

1997-2

003

2003-2

012

1992-2

000

2000-2

012

1992-2

002

2002-2

006

Argentina Bolivia Brazil Chile SLV Mexico Nicaragua Panama Paraguay Peru Uruguay Venezuela

Average of increase Average of decrease

Inequality, Poverty and the Middle-Class

12

Decline in Poverty 1992-2012(Ave. Headcount Ratio in %)

13

27.8 25.0

12.3

44.4 42.0

25.3

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

1992 2000 2012

Incidence of poverty, US$2.50 a day poverty line

Incidence of poverty, US$ 4 a day poverty line

On average, 39 percent of the reduction in poverty was due to the decline in inequality c. 2001-2010

14

-35

-30

-25

-20

-15

-10

-5

0

5

10

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

Nic

ara

gu

a

Mexic

o

El

Salv

ad

or

Arg

en

tin

a

Do

m.

Rep

.

Bo

livi

a

Ch

ile

Ecu

ad

or

Peru

LA

C-1

8

Bra

zil

Pan

am

a

Para

gu

ay

Ven

ezu

ela

Uru

gu

ay

Ho

nd

ura

s

Co

sta R

ica

Gu

ate

mala

Co

lom

bia

Ch

an

ge i

n p

ove

rty (

perc

en

tag

e p

oin

ts)

% c

on

trib

uti

on

of

each

eff

ect

Redistribution effect

Growth effect

Change in poverty ($4 a day) in percentage points

Declining inequality has contributed to the expansion of the “middle-class”

15Ferreira et al., 2012.

16

-5

0

5

10

15

20

25

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Mex

ico

Bo

livia

Nic

ara

gu

a

Do

m.

Rep

.

Ecu

ad

or

Ch

ile

Arg

en

tin

a

Bra

zil

LA

C-1

6

Para

gu

ay

Uru

gu

ay

Peru

Co

lom

bia

Pan

am

a

Ho

nd

ura

s

Co

sta

Ric

a

El

Salv

ad

or

Ch

an

ge i

n m

idd

le c

lass (

perc

en

tag

e p

oin

ts)

% c

on

trib

uti

on

of e

ach

eff

ect

Redistribution effect

Growth effect

Change in the size of the middle class (percentage points)

On average, 21 percent of the reduction in poverty was due to the decline in inequality c. 2001-2010

WHY?

17

Inequality in Latin America is high…

…but has been declining since around 2000

• In countries with high growth & low growth

• In countries with left and nonleftgovernments

• In commodity exporters and commodity importers

• In high and low (for Latam standards) inequality countries

18

Determinants of the decline in inequality: candidates

•Declining inequality of hourly labor income

• Larger and more progressive transfers

• Lower dependency ratios

•Higher participation rates of adults19

Proximate Determinants

Depending on the method (Yitzaki and Barros et al., respectively

• On average 62 or 54 percent of the reduction in the Gini coefficient can be attributed to changes in hourly labor income,)

• Changes in government transfers contributed, 17 or 21 percent on average

• Changes in pensions contributed 2 or 9 percent (includes noncontributory pensions)

20

Proximate Determinants

• Changes in demographic indicators, the equalizing effect of the share of adults accounted, on average, for 11 percent of the decline in inequality.

• Remarkably, the increase in the share of occupied adults in the household was unequalizing: its contribution in the inequality-increasing direction was 4 percent

– => Increase in labor force participation of women (the “yuppie couple” effect?)

21

22

-20

0

20

40

60

80

100

Nonparametric Parametric

Labor income Transfers

Other non-labor income Pensions

Capital Adult population

Occupation share

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

(Blue) (Azevedo et al. 2012)

23-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Argenna

Brazil

Chile

Colombia

CostaRica

DominicanRep.

Ecuador

ElSalvador

Honduras

Mexico

Panama

Paraguay

Peru

Uruguay

LAC-14

What explains the reduction in (hourly) labor income inequality? There are several not mutually exclusive candidates:

• human capital (years of schooling and experience)

• labor market institutions (minimum wages, unionization, informality)

• demographic composition of the labor force (age, gender, race)

• spatial segmentation (rural-urban, regional)

24

Standard labor economics separate out what can be attributed to:

• composition or endowment effect

– changes in the distribution of the observable characteristics of workers (e.g., age, years of schooling, race, gender, working in formal or informal markets, earnings above/below minimum wages, and geographic location)

• pay structure or returns effect

– changes in returns to those characteristics

25

• Estimates of the size of the endowment and pay structure effects for each factor help identify the orders of magnitude of the ‘proximate’ determinants of observed changes in labor income inequality

• The search for the ‘fundamental’ causes requires to assess the role of demand, supply and other factors (e.g., changes in the quality of education) in explaining the changes in returns to human capital

• One may want to push the causal inference process further by, for example, linking the changes to structural changes in the composition of output (led by, for example, a boom in international commodity prices) and changes in education policy

26

• Existing studies do not cover the entire range of potential candidates in each case

• However, available evidence suggests that a fall in the returns to human capital –in particular, in the returns to education– is a common factor to explain the decline in hourly labor income inequality

• In the majority of the sixteen countries where overall inequality declined, the return to primary, secondary and tertiary education versus no schooling or incomplete primary schooling declined.

27

• It should be noted that the endowment effect associated with changes in the distribution in education have tended to be unequalizing in spite of the fact that the distribution of educational attainment has become more equal

• This means that, had the pay structure by education level remained unchanged, the more equal distribution of the education endowment would have resulted in an increase in labor income inequality.

• Because this sounds counter-intuitive, this finding is known as the “paradox of progress.”(Bourguignon et al. (2005))

29

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

•Supply

•Demand

•Labor Market Institutions

•Declining “quality” in workers with tertiary degree

30

31

Table 2: Changes in the wage premium and the relative supply and demand

for skilled/unskilled workers (Gasparini et al., 2011)

Annual percent change

Wage premium Relative supply

Relative demand

(σ=2)

Relative demand

(σ=3)

1990s 2000s 1990s 2000s 1990s 2000s 1990s 2000s

Argentina 3.5 -2.4 4.6 2.4 11.5 -2.3 15.0 -4.7

Bolivia 7.9 -4.6 -0.2 5.1 15.6 -4.1 23.5 -8.7

Brazil -0.4 -3.2 1.6 4.4 0.8 -1.9 0.4 -5.1

Chile 0.5 -1.9 3.1 1.1 4.1 -2.7 4.6 -4.7

Colombia 2.5 -2.0 6.4 6.0 11.5 2.1 14.0 0.1

Costa Rica 0.4 -0.2 4.0 3.4 4.9 3.0 5.3 2.8

Ecuador -3.2 3.4 -3.0 -6.3

El Salvador 1.7 -0.1 5.5 -0.3 8.9 -0.4 10.6 -0.5

Honduras 0.0 -1.9 2.6 2.3 2.6 -1.4 2.6 -3.3

Mexico 1.8 -2.8 3.6 2.2 7.2 -3.5 9.0 -6.3

Nicaragua 3.5 -6.9 4.6 6.6 11.6 -7.2 15.0 -14.1

Panama 0.3 -2.3 2.3 2.4 2.9 -2.2 3.1 -4.4

Paraguay 0.8 -5.6 5.3 6.1 6.9 -5.2 7.6 -10.8

Peru 0.6 -2.8 0.2 3.8 1.3 -1.8 1.9 -4.6

Uruguay 2.3 -0.9 2.9 1.1 7.4 -0.6 9.6 -1.4

Venezuela 1.1 -4.8 3.9 4.2 6.2 -5.4 7.3 -10.3

Mean 1.8 -2.8 3.4 3.4 6.9 -2.3 8.6 -5.1

Zooming in

Brazil

32

Brazil: Decline in Inequality (Gini)

33

Wang, Yang. 2013. “Decomposing the Changes in Male Wage Distribution in Brazil.” Tulane University, Ph.D. field paper

Data: SEDLAC

.52

.54

.56

.58

.6.6

2

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011

Fig.1: Evolution of Household Per Capita Income Gini

Source: Ferreira et al. (2014) 34

Ferreira, F .H. G., S. Firpo, and J. Messina (2014) “A More Level Playing Field? Explaining

the Decline in Earnings Inequality in Brazil, 1995-2012”, IRIBA Working Paper: 12,

The University of Manchester.

Brazil: Decline in Wage Inequality

35


Source: Ferreira et al. (2014) 36

Ferreira, F .H. G., S. Firpo, and J. Messina (2014) “A More Level Playing Field? Explaining

the Decline in Earnings Inequality in Brazil, 1995-2012”, IRIBA Working Paper: 12,

The University of Manchester.

Brazil: Expansion of Education

37Source: Ferreira et al. (2014)

Brazil: Rising minimum wage


Brazil: Formalization


Brazil: Race and Gender


Brazil: decomposing just for human capital

• Decomposition of change in wage inequality:

• Pay Structure Effect: Change in Relative Wages => Equalizing

• Endowment Effect: Change in Composition for Education and Experience =>Slightly Unequalizing ( “paradox of progress)

41

42

-.1

0

.1

.2

.3

.4

1 11 21 31 41 51 61 71 81 91 100quantile

Log Wage Difference Composition Effect

Wage Structure Effect

Fig.10: RIF Decomposition: 2002-2011 Male

Brazil (2002-2011):

•Relative Wages=> Equalizing

•Composition Education & Experience =>Slightly Unequalizing


Brazil: Decomposing: human capital, gender/race, urban/rural, minimum wage,

informality


Zooming in: Brazil

• Relative Wages effect:

• Increase in relative supply of skilled workers (educational expansion)

• Increase in relative demand of low-skilled workers (agricultural commodity boom)

• Rising minimum wages

• Declining absolute real wages for workers with tertiary => degraded tertiary or skills obselescence?

44

Brazil: Decline in relative returns to education

45

0.5

11

.52

4-7 8-10 11-14 15+

2002 2011

Fig.8: Relative Return to Education


46


Brazil: Decline inskill premium coincides with theexpansion of the relative supply ofworkers with postsecondary education

Brazil: Decline in real wages for workers with tertiary

47

14

15

16

17

18

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Fig. 6: Average Hourly Wage of Tertiary Group: 2002-2011 Male


Zooming in

Mexico

48

Mexico: Decline in Inequality (Gini)

49

Campos, R., G. Esquivel and N. Lustig. 2014. “The Rise and Fall of Income Inequality in Mexico, 1989–2010,”Chapter 7 in Giovanni Andrea Cornia, ed., Falling Inequality in Latin America: Policy Changes and Lesssons, WIDER Studies in Development Economics, Oxford University Press,

Mexico: Wages by Education LevelDifference in Log Hourly Wage. Base Period 2008:1

50

Figure 4: Difference in Log Hourly Wage. Base Period 2008:1.

-30

-20

-10

01

0

% D

iffe

ren

ce L

og H

ourl

y W

ag

e

200

0q

2

200

1q

2

200

2q

2

200

3q

2

200

4q

2

200

5q

2

200

6q

2

200

7q

2

200

8q

2

200

9q

2

201

0q

2

201

1q

2

201

2q

2

201

3q

2

201

4q

2

Year - Quarter

Primary or Less Junior High School

High School College

Campos, Lopez-Calva and Lustig “Declining wages for college-educated workers in Mexico: disentangling the age, cohort and education effects,” to be presented at Latin American Inequality in the Long-run, Buenos Aires, December 5, 2014

Zooming in: Mexico• Decomposition of change in wage

inequality:

• Pay Structure Effect: Change in Relative Wages => Equalizing

• Endowment Effect: Change in Composition for Education and Experience =>Slightly Unequalizing ( “paradox of progress)

51

52

-.5

-.2

.1.4

.71

Log w

age e

ffects

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100Quantile

Total differential Effects of Characteristics

Effects of Returns


Mexico (1996-2010):

•Relative Wages=> Equalizing

•Composition Education & Experience =>Slightly Unequalizing

Zooming in: MexicoChange in Returns

• Minimum wages and unionization no effect

• Increase in relative supply of skilled workers

• Degraded tertiary?

• Skills obsolescence?

Campos, Lopez-Calva and Lustig (in progress)53

Real Minimum Wage and Unionization: 1988-2010 A. Real Minimum Wage Index (December

2010=100) B. Unionization Rate

10

01

20

14

01

60

18

02

00

Rea

l M

inim

um

Wag

e (D

ecem

ber

20

10

=1

00

)

1988m1 1992m1 1996m1 2000m1 2004m1 2008m1 2010m12Year

.1.1

2.1

4.1

6.1

8.2

Un

ion

izat

ion

Rat

e

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Year

ENIGH ENOE


In contrast to Brazil, in Mexico minimum wages did not increase at all…

Mexico: Relative returns and relative supply, 1989-2010 (High school and more vs. secondary or less)


Mexico:Decline inskill premium coincides with theexpansion of the relative supply ofworkers with postsecondary education

Mexico: Average Monthly Earnings for College-Educated Workers

56

8500

1000

011

500

1300

014

500

1600

0

Mon

thly

Lab

or In

com

e

2000

q2

2001

q2

2002

q2

2003

q2

2004

q2

2005

q2

2006

q2

2007

q2

2008

q2

2009

q2

2010

q2

2011

q2

2012

q2

2013

q2

2014

q2

Year - Quarter


57

Figure 10: Change in Relative Employment by age group. Restricted to workers with college.

1. Age 23-44 2. Age 45-65

51

01

52

02

53

0

% R

ela

tive

Em

plo

ym

en

t

2002 2004 2006 2008 2010 2012Year

Professionals Education Directors Supervisors

Admve Support Retail Rest

51

01

52

02

53

0

% R

ela

tive

Em

plo

ym

en

t

2002 2004 2006 2008 2010 2012Year

Professionals Education Directors Supervisors

Admve Support Retail Rest

Mexico: Employment Structure of College-Educated Workers


58

Mexico: Earnings by profession of College-Educated Workers


Transfers and Declining Inequality

59

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– 17 or 21 percent on average

www.commitmentoequity.org

60

http://www.commitmentoequity.org

61

-20

0

20

40

60

80

100

Nonparametric Parametric

Labor income Transfers

Other non-labor income Pensions

Capital Adult population

Occupation share

62

124%

58%

-24%

43%

2003-06 2006-09

Argen na-Reduc oninInequality:Market(blue)vs.Redistribu on(red)

Redistribu on

Market

Lustig, N. and C. Pessino. 2014.

Argentina: Rising role of transfers

63

110%

12%

-10%

88%

2003-06 2006-09

Argen na-Reduc oninPoverty:Market(blue)vs.Redistribu on(red)

Redistribu on

Market

Lustig, N. and C. Pessino. 2014.


Mexico: Rising role of transfers

Thank you!

65

References• Azevedo, Joao Pedro, Maria Eugenia Dávalos, Carolina Diaz-Bonilla, Bernardo Atuesta, and Raul Andres Castañeda. 2013.

“Fifteen Years of Inequality in Latin America: How Have Labor Markets Helped?” Policy Research Working Paper 6384, The World Bank.

• Azevedo, J. P., L. F. Lopez-Calva, N. Lustig, E. Ortiz-Juarez (2015) “Inequality, Mobility and Middle Classes in Latin America”, in: Dayton-Johnson, J. (2015) Latin America’s Emerging Middle Class. Palgrave McMillan. Bourguignon, F., F. Ferreira and N. Lustig. 2005. The Microeconomics of Income Distribution Dynamics in East Asia and Latin America, Oxford University Press, Washington, DC.

• Campos, Lopez-Calva and Lustig “Declining wages for college-educated workers in Mexico: disentangling the age, cohort and education effects,” to be presented at Latin American Inequality in the Long-run, Buenos Aires, December 5, 2014

• Campos, R., G. Esquivel and N. Lustig. 2014. “The Rise and Fall of Income Inequality in Mexico, 1989–2010,” Chapter 7 in Giovanni Andrea Cornia, ed., Falling Inequality in Latin America: Policy Changes and Lesssons, WIDER Studies in Development Economics, Oxford University Press, Oxford, United Kingdom .

• Ferreira, F .H. G., S. Firpo, and J. Messina (2014) “A More Level Playing Field? Explaining the Decline in Earnings Inequality in Brazil, 1995-2012”, IRIBA Working Paper: 12, The University of Manchester.

• Ferreira, Francisco H.G, Julian Messina, Jamele Rigolini, Luis F. Lopez-Calva, Maria Ana Lugo and Renos Vakis. 2013. “Economic Mobility and the Rise of the Latin American Middle Class.” Washington, D.C: The World Bank.

• Gasparini, Leonardo, Sebastian Galiani, Guillermo Cruces, and Pablo Acosta. 2011. “Educational Upgrading and Returns to Skills in Latin America. Evidence from a Supply-Demand Framework, 1990–2010.” Policy Research Working Paper 5921, The World Bank.

• Lopez-Calva, L. F. and N. Lustig. 2010. Declining Inequality in Latin America: A Decade of Progress?, Brookings Institution Press and UNDP.

• Lopez-Calva, L.F., N. Lustig, E. Ortiz-Juarez. 2014. “Inequality, Mobility and Middle Classes in Latin America.”

• Lustig, N. and C. Pessino. 2014. “Social Spending and Income Redistribution in Argentina in the 2000s: the Rising Role of Noncontributory Pensions,” in Public Finance Review, May 2014, Volume 42, Issue 3 Lustig, N., C. Pessino and J. Scott. 2014. “The Redistributive Impact of Taxes and Social Spending in Latin America. Special Issue.” Public Finance Review, May, Volume 42, Issue 3.

• Wang, Yang. 2013. “Decomposing the Changes in Male Wage Distribution in Brazil.” Tulane University, Ph.D. field paper.66

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