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How Mexico's financial crisis affected income distribution

Author

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  • Lopez-Acevedo, Gladys
  • Salinas, Angel

Abstract

After Mexico's financial crisis in 1994, the distribution of income, and labor earnings improved. Did inequality increase during the recession, as one would expect, since the rich have more ways to protect their assets than the poor do? After all, labor is poor people's only asset (the labor-hoarding hypothesis). In principle, one could argue that the richest deciles experienced severe capital losses, because of the crisis in 1994-96, and were hurt proportionately more than the poor were. But the facts don't support this hypothesis. As a share of total income, both monetary income (other than wages, and salaries) and financial income, increased during that period, especially in urban areas. Financial income is a growing source of inequality in Mexico. Mexico's economy had a strong performance in 1997. The aggregate growth rate was about 7 percent, real investment grew 24 percent, and exports 17 percent, industrial production increased 9.7 percent, and growth in civil construction (which makes intensive use of less skilled labor) was close to 11 percent. Given those figures, it is not surprising that the distribution of income, and labor earnings improved, but the magnitude, and quickness of the recovery prompted a close inspection of the mechanisms responsible for it. The authors analyze the decline in income inequality after the crisis, examine income sources that affect the level of inequality, and investigate the forces that drive inequality in Mexico. They find that in 1997 the crisis had hurt the income share of the top decile of the population, mainly by reducing its share of labor earnings. Especially affected were highly skilled workers in financial services, and non-tradables. Results from 1998 suggest that the labor earnings of those workers recovered, and in fact increased. Indeed, labor earnings are a growing source of income inequality.

Suggested Citation

  • Lopez-Acevedo, Gladys & Salinas, Angel, 2000. "How Mexico's financial crisis affected income distribution," Policy Research Working Paper Series 2406, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2406
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    References listed on IDEAS

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    1. Frank A. Cowell, 1980. "On the Structure of Additive Inequality Measures," Review of Economic Studies, Oxford University Press, vol. 47(3), pages 521-531.
    2. Moshe Buchinsky, 1998. "Recent Advances in Quantile Regression Models: A Practical Guideline for Empirical Research," Journal of Human Resources, University of Wisconsin Press, vol. 33(1), pages 88-126.
    3. Bell, Linda A, 1997. "The Impact of Minimum Wages in Mexico and Colombia," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages 102-135, July.
    4. Almeida dos Reis, Jose Guilherme & Paes de Barros, Ricardo, 1991. "Wage inequality and the distribution of education : A study of the evolution of regional differences in inequality in metropolitan Brazil," Journal of Development Economics, Elsevier, vol. 36(1), pages 117-143, July.
    5. Cesar Patricio Bouillon & Arianna Legovini & Nora Lustig, 2003. "Rising Inequality in Mexico: Household Characteristics and Regional Effects," Journal of Development Studies, Taylor & Francis Journals, vol. 39(4), pages 112-133.
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    Citations

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    Cited by:

    1. Raymundo M. Campos Vazquez & Nora Lustig & Alma S. Santillán, 2014. "A methodological note on the measurement of labor income in Mexico," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 29(1), pages 107-123.
    2. Foellmi, Reto & Oechslin, Manuel, 2010. "Market imperfections, wealth inequality, and the distribution of trade gains," Journal of International Economics, Elsevier, vol. 81(1), pages 15-25, May.
    3. Javier Cravino & Andrei A. Levchenko, 2017. "The Distributional Consequences of Large Devaluations," American Economic Review, American Economic Association, vol. 107(11), pages 3477-3509, November.
    4. McKenzie, David J., 2003. "How do Households Cope with Aggregate Shocks? Evidence from the Mexican Peso Crisis," World Development, Elsevier, vol. 31(7), pages 1179-1199, July.
    5. Rafael De Hoyos, 2012. "Accounting for Mexican Income Inequality During the 1990s," Journal of Income Distribution, Journal of Income Distribution, vol. 21(3-4), pages 103-125, November.
    6. Marina Halac & Sergio Schmukler, 2003. "Distributional effects of crises : the role of financial transfers," Policy Research Working Paper Series 3173, The World Bank.
    7. Elena Ianchovichina & Alessandro Nicita & Isidro Soloaga, 2002. "Trade Reform and Poverty: The Case of Mexico," The World Economy, Wiley Blackwell, vol. 25(7), pages 945-972, July.
    8. repec:ilo:ilowps:356575 is not listed on IDEAS
    9. Honohan, Patrick, 2005. "Banking sector crises and inequality," Policy Research Working Paper Series 3659, The World Bank.
    10. Diego Winkelried, 2005. "Income Distribution and the Size of the Informal Sector," Development and Comp Systems 0512005, EconWPA.
    11. repec:ilo:ilowps:456487 is not listed on IDEAS
    12. David J. McKenzie, 2001. "The Household Response to the Mexican Peso Crisis," Working Papers 01017, Stanford University, Department of Economics.

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