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Decomposing the recent inequality decline in Latin America

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  • Azevedo, Joao Pedro
  • Inchauste, Gabriela
  • Sanfelice, Viviane

Abstract

Over the past decade, 12 of 14 Latin American countries have experienced a reduction in inequality. Based on a series of counterfactual simulations, the observed changes in inequality are decomposed in order to identify the main determinants of inequality. In contrast to methods that focus on aggregate summary statistics, the method adopted in this paper generates counterfactual distributions, so that the analysis can account for changes related to demographics, occupation, labor earnings and transfers, pensions, and other nonlabor income sources. The results show that for the majority of countries in the sample, the most important contributor to the observed decline in inequality has been the relatively strong growth in labor earnings at the bottom of the income distribution. In particular, most of the reduction in inequality can be attributed to an increase in earnings per hour for the bottom of the income distribution. The paper also contributes to the literature on inequality in Latin America by providing the Shapley-Shorrocks value of this decomposition.

Suggested Citation

  • Azevedo, Joao Pedro & Inchauste, Gabriela & Sanfelice, Viviane, 2013. "Decomposing the recent inequality decline in Latin America," Policy Research Working Paper Series 6715, The World Bank.
    • Handle: RePEc:wbk:wbrwps:6715
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    References listed on IDEAS

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    1. 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 357-382, May.
    2. Dollar, David & Kraay, Aart, 2002. "Growth Is Good for the Poor," Journal of Economic Growth, Springer, vol. 7(3), pages 195-225, September.
    3. Ravallion, Martin, 2001. "Growth, Inequality and Poverty: Looking Beyond Averages," World Development, Elsevier, vol. 29(11), pages 1803-1815, November.
    4. Fortin, Nicole & Lemieux, Thomas & Firpo, Sergio, 2011. "Decomposition Methods in Economics," Handbook of Labor Economics, Elsevier.
    5. Azevedo, Joao Pedro & Davalos, Maria Eugenia & Diaz-Bonilla, Carolina & Atuesta, Bernardo & Castaneda, Raul Andres, 2013. "Fifteen years of inequality in Latin America : how have labor markets helped ?," Policy Research Working Paper Series 6384, The World Bank.
    6. Leonardo Gasparini & Guillero Cruces & Leopoldo Tornarolli, 2011. "Recent Trends In Income Inequality In Latin America," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Spring 20), pages 147-201, January.
    7. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-442, June.
    8. Ravallion, Martin & Chen, Shaohua, 2007. "China's (uneven) progress against poverty," Journal of Development Economics, Elsevier, vol. 82(1), pages 1-42, January.
    9. 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.
    10. Ravallion, M. & Datt, G., 1991. "Growth and Redistribution Components of Changes in Poverty Measures," Papers 83, World Bank - Living Standards Measurement.
    11. 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.
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    Keywords

    Poverty Impact Evaluation; Inequality; Services&Transfers to Poor; Labor Policies; Emerging Markets;

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