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Is labor income responsible for poverty reduction ? a decomposition approach

  • Azevedo, Joao Pedro
  • Inchauste, Gabriela
  • Olivieri, Sergio
  • Saavedra, Jaime
  • Winkler, Hernan

Demographics, labor income, public transfers, or remittances: Which factor contributes the most to observed reductions in poverty? Using counterfactual simulations, this paper accounts for the contribution labor income has made to the observed changes in poverty over the past decade for a set of 16 countries that have experienced substantial declines in poverty. In contrast to methods that focus on aggregate summary statistics, the analysis generates entire counterfactual distributions that allow assessing the contributions of different factors to observed distributional changes. Decompositions across all possible paths are calculated so the estimates are not subject to path-dependence. The analysis shows that for most countries in the sample, labor income is the most important contributor to changes in poverty. In ten of the countries, labor income explains more than half of the change in moderate poverty; in another four, it accounts for more than 40 percent of the reduction in poverty. Although public and private transfers were relatively more important in explaining the reduction in extreme poverty, more and better-paying jobs were the key factors behind poverty reduction over the past decade.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6414.

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Date of creation: 01 Apr 2013
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Handle: RePEc:wbk:wbrwps:6414
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  1. Ricardo Paes de Barros & Mirela de Carvalho & Samuel Franco & Rosane Mendonça, 2006. "Uma Análise das Principais Causas da Queda Recente na Desigualdade de Renda Brasileira," Discussion Papers 1203, Instituto de Pesquisa Econômica Aplicada - IPEA.
  2. Ravallion, Martin & Shaohua Chen, 2004. "China's (uneven) progress against poverty," Policy Research Working Paper Series 3408, The World Bank.
  3. Ravallion, Martin, 2001. "Growth, Inequality and Poverty: Looking Beyond Averages," World Development, Elsevier, vol. 29(11), pages 1803-1815, November.
  4. Stanislav Kolenikov & Anthony Shorrocks, 2005. "A Decomposition Analysis of Regional Poverty in Russia," Review of Development Economics, Wiley Blackwell, vol. 9(1), pages 25-46, 02.
  5. Datt, Gaurav & Ravallion, Martin, 1992. "Growth and redistribution components of changes in poverty measures : A decomposition with applications to Brazil and India in the 1980s," Journal of Development Economics, Elsevier, vol. 38(2), pages 275-295, April.
  6. Ravallion, Martin & Chen, Shaohua, 1997. "What Can New Survey Data Tell Us about Recent Changes in Distribution and Poverty?," World Bank Economic Review, World Bank Group, vol. 11(2), pages 357-82, May.
  7. Dollar, David & Kraay, Aart, 2001. "Growth is good for the poor," Policy Research Working Paper Series 2587, The World Bank.
  8. Joao Pedro Azevedo & Minh Cong Nguyen & Viviane Sanfelice, 2012. "ADECOMP: Stata module to estimate Shapley Decomposition by Components of a Welfare Measure," Statistical Software Components S457562, Boston College Department of Economics.
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