2014_05-21_OECD-ECLAC-PSE EU-LAC Forum_lustig

Declining Inequality in La0n America Nora Lus)g

Tulane University Nonresident Fellow CGD and IAD

CEPAL-‐OECD Paris – May 21, 2014

Inequality in La0n America is high… …but has been declining since around 2000 •  Decline is pervasive and significant •  Larger than the rise in inequality in 1990s •  Important contribu)on to the decline in poverty •  Contributed to the rise of the middle-‐class •  In countries with high growth & low growth •  In countries with leQ and nonleQ governments •  In commodity exporters and commodity importers

2

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 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 Ferreira and Ravallion, 2008.

Inequality declined during the 2000’s

La)n America: Declining income inequality by country: 2000-‐2011 (Annual Change of Gini in %)

4

-2.64

-2.05 -1.99

-1.30 -1.24 -1.17 -1.07 -1.03 -0.91 -0.79 -0.74 -0.72 -0.47 -0.39

-0.20 -0.10

0.61

-0.95

2.12

0.82 0.77

0.40

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

Nic

arag

ua

Bol

ivia

Ecu

ador

Arg

entin

a

El S

alva

dor

Mex

ico

Ven

ezue

la

Bra

zil

Peru

Dom

. Rep

.

Pana

ma

Chi

le

Cos

ta R

ica

Para

guay

Uru

guay

Gua

tem

ala

Hon

dura

s

LAC

-17

Chi

na

Sout

h A

fric

a

Indi

a

USA

The decline of income inequality in the 2000s has been higher that the rise in the 1990s (Annual average change in Gini in %)

8.2$

%10.1$

1.8$

%4.2$

4.1$

%5.4$

0.8$

%3.5$

0.1$

%4.8$

2.9$

%7.0$

3.1$

%6.8$

1.5$

%4.6$

0.2$

%4.5$

0.4$

%7.0$

4.9$

%8.7$

2.5$

%6.1$

%15.0$

%10.0$

%5.0$

0.0$

5.0$

10.0$

1992%2002$

2002%2011$

1997%2002$

2002%2008$

1985%1998$

1998%2009$

1992%1998$

1998%2009$

2000%2003$

2003%2010$

1995%2001$

2001%2010$

1989%1996$

1996%2010$

1989%2001$

2001%2010$

1997%2003$

2003%2010$

1997%2003$

2003%2010$

1989%2002$

2002%2010$

Argen3na$ Bolivia$ Brazil$ Chile$ Dominican$

Rep.$

El$Salvador$ Mexico$ Panama$ Paraguay$ Peru$ Venezuela$

Change$in$Gini$coefficient,$expressed$in$percentage$points$ Average$of$increase$ Average$of$decrease$

On average, 40 percent of the reduc0on in poverty was due to the decline in inequality c. 2001-‐2010

6

-35

-30

-25

-20

-15

-10

-5

0

5

10

-30%

-10%

10%

30%

50%

70%

90%

110%

130%

Nic

arag

ua

Mex

ico

El S

alva

dor

Arg

enti

na

Dom

. Rep

.

Bol

ivia

Chi

le

Ecu

ador

Peru

LAC

-18

Bra

zil

Pana

ma

Para

guay

Ven

ezue

la

Uru

guay

Hon

dura

s

Cos

ta R

ica

Gua

tem

ala

Col

ombi

a

Ch

ange

in p

ove

rty

(per

cen

tage

po

ints

)

% c

on

trib

uti

on

of

each

eff

ect

Growth effect Redistribution effect Change in poverty ($4 a day) in percentage points

Lopez-‐Calva, L.F., N. Lus)g, E. Or)z-‐Juarez. 2014. “Inequality, Mobility and Middle Classes in La)n America.” Mimeo, May.

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

7 Ferreira et al., 2012.

8 Lopez-‐Calva, L.F., N. Lus)g, E. Or)z-‐Juarez. 2014. “Inequality, Mobility and Middle Classes in La)n America.” Mimeo,May.

The faster the decline in inequality, the faster the growth of the middle-‐class

Determinants of the decline in inequality

• Declining inequality of hourly labor income • Larger and more progressive transfers • Lower dependency ra)os & higher par)cipa)on rates of adults

9

Contribu0on of proximate determinants to the decline in inequality (%) La)n America, c. 2000-‐2010

10

Source: Non-‐parametric decomposi)on results from Azevedo et al. (2013a); and parametric results provided by CEDLAS, based on data from SEDLAC (CEDLAS and The World Bank).

54 62

21 17

10 15 9 2

-1

4 11

-4

-20

0

20

40

60

80

100

120

Non-parametric Parametric

Occupation share

Adult population

Capital

Pensions

Other non-labor income

Transfers

Labor income LABOR INCOME

TRANSFERS

LABOR INCOME

Decomposing Decline in Inequality Labor (red); Transfers (Green); Demog

(Blue) (Azevedo et al. 2012)

11 !80%%

!60%%

!40%%

!20%%

0%%

20%%

40%%

60%%

80%%

100%%

Argen/na%

Brazil%

Chile%

Colom

bia%

Costa%Rica%

Dominican%Rep.%

Ecuador%

El%Salvador%

Honduras%

Mexico%

Panama%

Paraguay%

Peru%

Uruguay%

LAC!14%

Determinants of declining inequality

in hourly labor earnings: Decline in returns to post-‐secondary

educa)on (aka. skill premium) • Supply • Demand • Labor Market Ins)tu)ons • Declining “quality” in workers with ter)ary degree

12

Zooming in: Brazil •  Low growth during most of the period •  Decomposi)on: •  Wage Structure Effect Equalizing •  Workers’ Characteris)cs Effect Slightly Unequalizing (Bourguignon et al., 2005) “paradox of progress)

•  Wage structure effect: •  Increase in rela)ve supply of skilled workers •  Increase in rela)ve demand of low-‐skilled workers •  Rising minimum wages •  Declining Absolute real wages for workers with ter)ary => degraded ter)ary?

13

Brazil: Decline in Wage Inequality

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

15

-.1

0

.1

.2

.3

.4

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

Log Wage Difference Composition EffectWage Structure Effect

Fig.10: RIF Decomposition: 2002-2011 MaleBrazil (RIF) Decomposi)on (2002-‐2011):

•  Changes in Wage Structure Equalizing

• Changes in Workers’ Characteris)cs Slightly Unequalizing

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

Brazil: Decline in rela0ve returns to educa0on or “skill premium”

16

0.5

11.

52

4-7 8-10 11-14 15+

2002 2011

Fig.8: Relative Return to Education


2002

2011


Brazil: Decline in skill premium coincides with the expansion of the rela)ve supply of workers with post secondary educa)on

Rela)ve Returns To Educa)on

Rela)ve Supply of Workers w/ Post-‐ secondary

Brazil: Rising minimum wage

18

200

250

300

350

400

Mini

mum

Wag

e in

2002

Rea

is

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Fig.13: Minimum Wage in Reais: 2002 Price


Brazil: Decline in absolute wages for workers with ter0ary

19

1415

1617

18

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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


“Degraded” Ter)ary? Brazil 2002-‐2011


Kdensity of Log Hourly Wage: Tertiary

0.1

.2.3

.4.5

kden

sity l

og_h

wage

0 2 4 6

2002 2011

Zooming in: Mexico •  Low growth •  Decomposi)on: • Wage Structure Effect Equalizing •  Composi)on Effect Slightly Unequalizing (Bourguignon et al., 2005) “paradox of progress)

•  Wage structure effect: •  Increase in rela)ve supply of skilled workers •  Minimum wages and unioniza)on no effect •  Degraded ter)ary?

21

Mexico: Decline in Inequality (Gini)

22

Campos, R., G. Esquivel and N. Lus)g. 2014. “The Rise and Fall of Income Inequality in Mexico, 1989–2010,” Chapter 7 in Giovanni Andrea Cornia, ed., Falling Inequality in La3n America: Policy Changes and Lesssons, WIDER Studies in Development Economics, Oxford University Press,

Hourly Wage

23

-.5

-.2

.1.4

.71

Log w

age e

ffe

cts

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 CharacteristicsEffects of Returns

Mexico (RIF) Decomposi)on (1996-‐2010):

• Changes in workers characteris)cs • => unequalizing

• Wage Structure Effect => Equalizing


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

2010=100) B. Unionization Rate

100

120

140

160

180

200

Rea

l Min

imum

Wag

e (D

ecem

ber 2

010=

100)

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

.1.1

2.1

4.1

6.1

8.2

Uni

oniz

atio

n R

ate

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

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 in skill premium coincides with the expansion of the rela)ve supply of workers with post secondary educa)on

How redistribu0ve are La0n American governments?

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

•  Social spending and tax incidence analysis for 14 countries (8 from La)n America)

•  www.commitmentoequity.org

26

Redistribu0on in the rich and developing countries

Sources: Immervoll et al. (2009) for EU and for CEQ countries see Lus)g (2014) and slides at the end. Note: in these calcula)ons contributory pensions are part of market income and NOT treated as a government transfer. 27

-‐0.18

-‐0.16

-‐0.14

-‐0.12

-‐0.10

-‐0.08

-‐0.06

-‐0.04

-‐0.02

0.00

Change in Gini: Disposable vs. Market (in percentage points)

DEVELOPING COUNTRIES RICH

COUNTRIES

Zooming in (CEQ 14 countries; LA 8 in red)

Sources: Lus)g (2014) and slides at the end. Note: in these calcula)ons contributory pensions are part of market income and NOT treated as a government transfer.

28

GUA ELS BOL PER

CRI MEX

-‐0.08

-‐0.07

-‐0.06

-‐0.05

-‐0.04

-‐0.03

-‐0.02

-‐0.01

0.00

Change in Gini: Disposable vs. Market (in percentage points)

URY

BRA

29

124%%

58%%

(24%%

43%%

2003$06& 2006$09&

Argen/na(Reduc/on%in%Inequality:%Market%(blue)%vs.%Redistribu/on%(red)%%

Redistribu1on&

Market&

Lus)g, N. and C. Pessino. 2014.

Argen0na: Rising role of transfers

30

110%$

12%$&10%$

88%$

2003$06& 2006$09&

Argen-na&Reduc-on$in$Poverty:$Market$(blue)$vs.$Redistribu-on$(red)$$

$

Redistribu1on&

Market&

Lus)g, N. and C. Pessino. 2014.

Mexico: The impact of cash transfers on inequality and poverty, 1996, 2000 and 2010

Net market income Disposable income 1996 Gini 0.522 0.520

% change with respect to net market income –– -0.4%

Headcount index ($2.5 PPP) 30.2% 29.9%

% change wrt net market income –– -1.0%

2000 Gini 0.544 0.539


Headcount index ($2.5 PPP) 22.1% 21.6%


2010 Gini 0.503 0.495


Headcount index ($2.5 PPP) 13.8% 11%



Mexico: Rising role of transfers

Thank you!

32

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

Castañeda. 2013. “FiQeen Years of Inequality in La)n America: How Have Labor Markets Helped?” Policy Research Working Paper 6384, The World Bank.

•  Bourguignon, F., F. Ferreira and N. Lus)g. 2005. The Microeconomics of Income Distribu3on Dynamics in East Asia and La3n America, Oxford University Press, Washington, DC.

•  Campos, R., G. Esquivel and N. Lus)g. 2014. “The Rise and Fall of Income Inequality in Mexico, 1989–2010,” Chapter 7 in Giovanni Andrea Cornia, ed., Falling Inequality in La3n America: Policy Changes and Lesssons, WIDER Studies in Development Economics, Oxford University Press, Oxford, United Kingdom .

•  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 La)n American Middle Class.” Washington, D.C: The World Bank.

•  Gasparini, Leonardo, Sebas)an Galiani, Guillermo Cruces, and Pablo Acosta. 2011. “Educa)onal Upgrading and Returns to Skills in La)n America. Evidence from a Supply-‐Demand Framework, 1990–2010.” Policy Research Working Paper 5921, The World Bank.

•  Lopez-‐Calva, L. F. and N. Lus)g. 2010. Declining Inequality in La3n America: A Decade of Progress?, Brookings Ins)tu)on Press and UNDP.

•  Lopez-‐Calva, L.F., N. Lus)g, E. Or)z-‐Juarez. 2014. “Inequality, Mobility and Middle Classes in La)n America.” Mimeo, May.

•  Lus)g, N., L. F. Lopez-‐Calva, E. Or)z-‐Juarez. 2014. “Deconstruc)ng the Decline in Inequality in La)n America,” chapter in Devlin, Machinea, Chavarria (eds.), (published in Spanish)

•  Lus)g, Nora. 2014. “Taxes, Transfers, Inequality and the Poor in the Developing World. Round 1.” CEQ Working Paper No. 23, Center for Inter-‐American Policy and Research and Department of Economics, Tulane University and Inter-‐American Dialogue

•  Lus)g, N. and C. Pessino. 2014. “Social Spending and Income Redistribu)on in Argen)na in the 2000s: the Rising Role of Noncontributory Pensions,” in Public Finance Review, May 2014, Volume 42, Issue 3 Lus)g, N., C. Pessino and J. Scow. 2014. “The Redistribu)ve Impact of Taxes and Social Spending in La)n America. Special Issue.” Public Finance Review, May, Volume 42, Issue 3.

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

33

CEQ Teams (Year of Survey; C=consump0on & I=income)(MWB Version)

1.   Argen0na (2009, I): Nora Lus)g and Carola Pessino (CEQ Web Dec 2013) Public Finance Review, May 2014, Volume 42, Issue 3

2.   Bolivia (2009; I): Veronica Paz Arauco, George Gray-‐Molina, Wilson Jimenez and Ernesto Yañez (CEQ Web Dec 2013) Public Finance Review, May 2014, Volume 42, Issue 3

3.   Brazil (2009; I): Sean Higgins and Claudiney Pereira (CEQ Web Dec 2013) Public Finance Review, May 2014, Volume 42, Issue 3

4.   Costa Rica (2010; I): Pablo Sauma and Juan Diego Trejos (February 2014; paper)

5.   El Salvador (2011; I): Margarita Beneke, Nora Lus)g and Jose Andres Oliva (March 11, 2014)

6.   Guatemala (2011; I): Maynor Cabrera, Nora Lus)g and Hilcias E. Moran (April 13, 2014)

34

CEQ Teams (Year of Survey; C=consump0on & I=income)(MWB Version)

10  Mexico (2010; I): John Scow (CEQ Web Dec 2013) Public Finance Review, May 2014, Volume 42, Issue 3

11  Peru (2009; I): Miguel Jaramillo (CEQ Web Dec 2013) Public Finance Review, May 2014, Volume 42, Issue 3

12  United States (2011; I): Sean Higgins, Nora Lus)g, Whitney Ruble and Timothy Smeeding

13  Uruguay (2009; I): Marisa Bucheli, Nora Lus)g, Maximo Rossi and Florencia Amabile (CEQ Web Dec 2013) Public Finance Review, May 2014, Volume 42, Issue 3

•  Research Assistant: Yang Wang, Tulane University

35

Economy & Finance

2014_05-21_OECD-ECLAC-PSE EU-LAC Forum_lustig