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Decomposing the recent inequality decline in Latin America

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

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.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6715.

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Date of creation: 01 Dec 2013
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Handle: RePEc:wbk:wbrwps:6715
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  1. Leonardo Gasparini & Guillermo Cruces & Leopoldo Tornarolli, 2009. "Recent trends in income inequality in Latin America," Working Papers 132, ECINEQ, Society for the Study of Economic Inequality.
  2. Ravallion, Martin & Shaohua Chen, 2004. "China's (uneven) progress against poverty," Policy Research Working Paper Series 3408, The World Bank.
  3. Ravallion, M. & Datt, G., 1991. "Growth and Redistribution Components of Changes in Poverty Measures," Papers 83, World Bank - Living Standards Measurement.
  4. Ravallion, Martin, 2001. "Growth, Inequality and Poverty: Looking Beyond Averages," World Development, Elsevier, vol. 29(11), pages 1803-1815, November.
  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. 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.
  7. 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.
  8. Ravallion, Martin & Shaohua Chen, 1996. "What can new survey data tell us about recent changes in distribution and poverty?," Policy Research Working Paper Series 1694, The World Bank.
  9. 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 410-42, June.
  10. Dollar, David & Kraay, Aart, 2001. "Growth is good for the poor," Policy Research Working Paper Series 2587, The World Bank.
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