Accounting for Mexican Income Inequality During the 1990s

The present study measures the extent to which income disparities in Mexico can be attributed to sectoral asymmetries and differences in skill endowments. The results show that close to 40 per cent of per capita household income inequality in Mexico during the 1990s is attributable to incomes derived from formal self-employment; this refers to entrepreneurial activities, an income factor rarely analyzed in the inequality literature. We show that education endowments (skills) are unevenly distributed among the Mexican population, with positive shifts in the market returns to schooling being associated with increases in inequality. Asymmetries in the distribution of education endowments explain around 20 per cent of overall household income disparities in Mexico during the 1990s. Moreover, the results show that the proportion of inequality attributable to education endowments increased during stable periods and reduced during the 1994--1995 economic crisis. This pattern is mostly explained by shifts in returns to schooling rather than changes in the distribution of skills. Applying the same techniques to decompose within-sector income differences, the study show that skill endowments can account for as much as 25 per cent of differences in earnings, but as little as 10 per cent of income dispersion among formal self-employed workers.