Declining Inequality in La0n America Nora Lus)g Tulane University and Nonresident Fellow CGD and IAD SAIS Washington, DC, September 17, 2014 Inequality in La0n America is high… …but has been declining since around 2000 •  Decline is pervasive and significant •  Larger than the rise in inequality in 1990s •  Important contribu)on to the decline in poverty •  Contributed to the rise of the middle-­‐class •  In countries with high growth & low growth •  In countries with leO and nonleO governments •  In commodity exporters and commodity importers 2 LATAM IS THE MOST UNEQUAL REGION IN THE WORLD Gini Coefficient by Region (in %), 2004 60.0
55.0
53.2
Gini coefficient
50.0
44.7
45.0
40.0
35.0
32.2
38.9
38.9
39.1
South Asia
North Africa
and the
Middle East
East Asia and
the Pacific
33.6
30.0
25.0
20.0
High Incom e
Europe and
Central Asia
Ferreira and Ravallion, 2008. Sub-Saharan Latin Am erica
Africa
and the
Caribbean
3 Inequality declined during the 2000’s La)n America: Declining income inequality by country: 2000-­‐2011 (Annual Change of Gini in %) 3.00
2.12
2.00
1.00
0.82 0.77
0.61
0.40
0.00
-1.00
-1.17
-1.30 -1.24
-2.00
-1.07
-0.79
-0.91
-1.03
-0.74 -0.72
-0.47 -0.39
-0.20 -0.10
-0.95
USA
India
South Africa
China
LAC-17
Honduras
Guatemala
Uruguay
Paraguay
Costa Rica
Chile
Panama
Dom. Rep.
Peru
Brazil
Venezuela
Mexico
El Salvador
Argentina
Ecuador
Nicaragua
-3.00 -2.64
Bolivia
-2.05 -1.99
4 The decline of income inequality in the 2000s has been higher that the rise in the 1990s (Annual average change in Gini in %) Change$in$Gini$coefficient,$expressed$in$percentage$points$
10.0$
Average$of$increase$
Average$of$decrease$
8.2$
4.9$
4.1$
5.0$
3.1$
2.9$
1.8$
1.5$
0.8$
2.5$
0.4$
0.2$
0.1$
0.0$
%3.5$
%4.2$
%5.0$
%4.6$
%4.8$
%4.5$
%6.1$
%5.4$
%6.8$
%7.0$
%7.0$
%8.7$
%10.0$
Argen3na$
Bolivia$
Brazil$
Chile$
Dominican$
Rep.$
El$Salvador$
Mexico$
Panama$
Paraguay$
Peru$
2002%2010$
1989%2002$
2003%2010$
1997%2003$
2003%2010$
1997%2003$
2001%2010$
1989%2001$
1996%2010$
1989%1996$
2001%2010$
1995%2001$
2003%2010$
2000%2003$
1998%2009$
1992%1998$
1998%2009$
1985%1998$
2002%2008$
1997%2002$
2002%2011$
%15.0$
1992%2002$
%10.1$
Venezuela$
On average, 39 percent of the reduc0on in poverty was due to the decline in inequality c. 2001-­‐2010 Change in poverty ($4 a day) in percentage points
10
110%
5
0
90%
-5
70%
-10
50%
-15
30%
-20
10%
-25
Colombia
Guatemala
Costa Rica
Honduras
Uruguay
Venezuela
Paraguay
Panama
Brazil
LAC-18
Peru
Ecuador
Chile
Bolivia
Dom. Rep.
-35
Argentina
-30%
El Salvador
-30
Mexico
-10%
Change in poverty (percentage points)
Redistribution effect
130%
Nicaragua
% contribution of each effect
Growth effect
Lopez-­‐Calva, L.F., N. Lus)g, E. Or)z-­‐Juarez. 2014. “Inequality, Mobility and Middle Classes in La)n America.” Mimeo, 6 May. Declining inequality has contributed to the expansion of the “middle-­‐class” Ferreira et al., 2012. 7 The faster the decline in inequality, the fastest the growth of the middle-­‐class 8 Lopez-­‐Calva, L.F., N. Lus)g, E. Or)z-­‐Juarez. 2014. “Inequality, Mobility and Middle Classes in La)n America.” Mimeo,May. Determinants of the decline in inequality • Declining inequality of hourly labor income • Larger and more progressive transfers • Lower dependency ra)os & higher par)cipa)on rates of adults 9 Decomposing Decline in Inequality Labor (red); Transfers (Green); Demog (Blue) (Azevedo et al. 2012) 100%%
80%%
60%%
40%%
20%%
14
%
LA
C!
y%
Ur
ug
ua
Pe
ru
%
y%
Pa
ra
gu
a
am
a%
Pa
n
ex
ico
%
%
M
nd
ur
as
r%
do
Ho
lva
r%
El
%S a
do
%
Ec
ua
n%
Re
p.
ca
%
Do
m
in
ica
a%
Ri
a%
Co
st
m
bi
lo
Ch
il%
ile
%
Co
!20%%
Br
az
Ar
ge
n/
na
%
0%%
!40%%
!60%%
!80%%
10 Determinants of declining inequality in hourly labor earnings: to post-­‐secondary Decline in returns educa)on (aka. skill premium) • Supply • Demand • Labor Market Ins)tu)ons • Declining “quality” in workers with ter)ary degree 11 Zooming in Brazil 12 Zooming in Brazil: Decline in Inequality (Gini) .52
.54
.56
.58
.6
.62
Fig.1: Evolution of Household Per Capita Income Gini
Data: SEDLAC
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
Wang, Yang. 2013. “Decomposing the Changes in Male Wage Distribu)on in Brazil.” Tulane University, Ph.D. field paper 13 Zooming in: Brazil •  Low growth during most of the period •  Decomposi)on of change in wage inequality: •  Change in Rela)ve Wages => Effect Equalizing •  Change in Composi)on for Educa)on and Experience =>Slightly Unequalizing (Bourguignon et al., 2005) “paradox of progress) 14 Zooming in: Brazil •  Rela)ve Wages effect: •  Increase in rela)ve supply of skilled workers •  Increase in rela)ve demand of low-­‐skilled workers •  Rising minimum wages •  Declining absolute real wages for workers with ter)ary => degraded ter)ary? 15 Brazil: Decline in Wage Inequality Wang, Yang. 2013. “Decomposing the Changes in Male Wage Distribu)on in Brazil.” Tulane University, Ph.D. field paper 16 Brazil (2002-­‐2011): Fig.10: RIF Decomposition: 2002-2011 Male
.4
• Rela)ve Wages => Equalizing .3
.2
.1
0
-.1
1
11
21
31
41
51
quantile
Log Wage Difference
Wage Structure Effect
61
71
81
91
Composition Effect
100
• Composi)on Educa)on & Experience =>Slightly Unequalizing Wang, Yang. 2013. “Decomposing the Changes in Male Wage Distribu)on in Brazil.” Tulane University, Ph.D. field paper 17 Brazil: Decline in rela0ve returns to educa0on 0
.5
1
1.5
2
Fig.8: Relative Return to Education
4-7
8-10
11-14
2002
15+
2011
Wang, Yang. 2013. “Decomposing the Changes in Male Wage Distribu)on in Brazil.” Tulane University, Ph.D. field paper 18 Brazil: Decline in skill premium coincides with the expansion of the rela)ve supply of workers with post secondary educa)on Wang, Yang. 2013. “Decomposing the Changes in Male Wage Distribu)on in Brazil.” Tulane University, Ph.D. field paper 19 Brazil: Rising minimum wage Fig.13: Minimum Wage in Reais: 2002 Price
Minimum Wage in 2002 Reais
400
350
300
250
200
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Wang, Yang. 2013. “Decomposing the Changes in Male Wage Distribu)on in Brazil.” Tulane University, Ph.D. field paper 20 Brazil: Decline in real wages for workers with ter0ary 14
15
16
17
18
Fig. 6: Average Hourly Wage of Tertiary Group: 2002-2011 Male
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Wang, Yang. 2013. “Decomposing the Changes in Male Wage Distribu)on in Brazil.” Tulane University, Ph.D. field paper 21 Zooming in Mexico 22 Zooming in Mexico Decline in Inequality (Gini) Campos, R., G. Esquivel and N. Lus)g. 2014. “The Rise and Fall of Income Inequality in Mexico, 1989–2010,” Chapter 7 in Giovanni Andrea Cornia, ed., Falling Inequality in La/n America: Policy Changes and Lesssons, 23 WIDER Studies in Development Economics, Oxford University Press, Zooming in: Mexico •  Low growth •  Decomposi)on of change in wage inequality: •  Change in Rela)ve Wages => Effect Equalizing •  Change in Composi)on for Educa)on and Experience =>Slightly Unequalizing 24 Zooming in: Mexico •  Change in Rela)ve Wages •  Increase in rela)ve supply of skilled workers •  Minimum wages and unioniza)on no effect •  Degraded ter)ary? 25 -.2
.1
.4
• Rela)ve Wages => Equalizing -.5
Log wage effects
.7
1
Mexico (1996-­‐2010): 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
Quantile
Total differential
Effects of Returns
Effects of Characteristics
• Composi)on Educa)on & Experience =>Slightly Unequalizing Campos, R., G. Esquivel and N. Lus)g. 2014. “The Rise and Fall of Income Inequality in Mexico, 1989–2010,” Chapter 7 in Giovanni Andrea Cornia, ed., Falling Inequality in La/n America: Policy Changes and Lesssons, 26 WIDER Studies in Development Economics, Oxford University Press, Mexico: Relative returns and relative supply, 1989-2010
(High school and more vs. secondary or less)
Mexico: Decline in skill premium coincides with the expansion of the rela)ve supply of workers with post secondary educa)on Campos, R., G. Esquivel and N. Lus)g. 2014. “The Rise and Fall of Income Inequality in Mexico, 1989–2010,” Chapter 7 in Giovanni Andrea Cornia, ed., Falling Inequality in La/n America: Policy Changes and Lesssons, WIDER Studies in Development Economics, Oxford University Press, 20
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
0
10
% Schooling
30
40
Mexico:Changes in Schooling Year
Less than Primary (0-5)
Secondary (9-11)
College (16+)
Primary (6-8)
High School (12-15)
Note: Popula)on age 20-­‐65, ENE from 2000-­‐2004 and ENOE 2005-­‐2014. Representa)ve at the na)onal level. Full sample. In contrast to Brazil, in Mexico minimum wages did not increase at all… Real Minimum Wage and Unionization: 1988-2010
A. Real Minimum Wage Index (December
2010=100)
100
.16
.14
.1
120
.12
140
160
Unionization Rate
180
.18
.2
200
B. Unionization Rate
1988
1988m1
1992m1
1996m1
2000m1
Year
2004m1
2008m1 2010m12
1990
1992
1994
1996
1998
2000
Year
ENIGH
2002
2004
2006
2008
ENOE
Campos, R., G. Esquivel and N. Lus)g. 2014. “The Rise and Fall of Income Inequality in Mexico, 1989–2010,” Chapter 7 in Giovanni Andrea Cornia, ed., Falling Inequality in La/n America: Policy Changes and Lesssons, WIDER Studies in Development Economics, Oxford University Press, 2010
10000
5000
2014q2
2013q2
2012q2
2011q2
2010q2
2009q2
2008q2
2007q2
2006q2
2005q2
2004q2
2003q2
2002q2
2001q2
2000q2
0
Monthly Labor Income
15000
Income: educa)on Year - Quarter
Less than Primary (0-5)
Secondary (9-11)
College (16+)
Primary (6-8)
High School (12-15)
Campos, Lopez-­‐Calva and Lus)g (2014) Note: Popula)on age 20-­‐65, ENE from 2000-­‐2004 and ENOE 2005-­‐2014. Representa)ve at the na)onal level. Sample restricted to those with valid labor income. All employment: salaried, self-­‐employment and employers. Constant Mexican Pesos 2014:1. Government Transfers 31 How redistribu0ve are La0n American governments? •  Decomposi)on of changes in inequality by income source show that transfers is, on average, the second most important proximate determinant of decline in overall inequality •  Social spending and tax incidence analysis for 14 countries (8 from La)n America) •  www.commitmentoequity.org 32 33 Redistribu0on in the rich and developing countries Sources: Immervoll et al. (2009) for EU and for CEQ countries see Lus)g (2014) and slides at the end. Note: in these calcula)ons contributory pensions are part of market income and NOT treated as a government transfer. 34 Zooming in (CEQ 14 countries; LA 8 in red) Change in Gini: Disposable vs. Market Income (in GINI points) 0.00 -­‐0.01 -­‐0.02 -­‐0.03 -­‐0.04 -­‐0.05 -­‐0.06 -­‐0.07 -­‐0.08 Sources: Lus)g (2014) and slides at the end. Note: in these calcula)ons contributory pensions are part of market income and NOT treated as a government transfer. 35 Redistribu0on rises with income per capita Change in Gini: Disposable vs Market (decline in Gini points shown in posi0ve quadrant) 0.08 ZAF 0.07 0.06 0.05 0.04 0.03 0.02 SLV 0.00 0 2000 BOL IND 4000 LKA URY CRI JOR ETH 0.01 BRA AMR MEX PER GTM 6000 8000 10000 12000 14000 16000 GNI/Capita
Sources: Lus)g (2014) and slides at the end. Note: in these calcula)ons contributory pensions are part of market income and NOT treated as a government transfer. 36 …. the more unequal, the more redistribu0on Change in Gini: Disposable vs. Market Income (decline in Gini points shown in posi)ve quadrant) 0.08 0.07 0.06 0.05 BRA URY ARM 0.04 CRI MEX 0.03 JOR 0.02 LKA SLV BOL PER GTM IND 0.01 0.00 0.30 0.40 0.50 0.60 Mkt Income Gini
Sources: Lus)g (2014) and slides at the end. ZAF 0.70 0.80 Note: in these calcula)ons contributory pensions are part of market income and NOT treated as a government transfer. 37 Higher inequality is associated with more redistribu0ve “effort:” spending on transfers/GDP rises with inequality Direct Transfer/GDP
Direct Transfers/GDP vs. Mkt Income Gini 0.05 BRA 0.05 0.04 0.04 0.03 ARM URY 0.03 LKA BOL 0.02 SLV ETH CRI 0.02 MEX JOR 0.01 GUM IND PER 0.01 0.00 0.30 0.40 0.50 0.60 Mkt Income Gini
ZAF 0.70 0.80 Sources: Lus)g (2014) and slides at the end. Note: in these calcula)ons contributory pensions are part of market income and NOT treated as a government transfer. 38 …and so does social spending/GDP Social Spending/GDP vs. Mkt Income Gini 0.20 Social Spending/GDP
0.18 CRI BOL URY 0.16 0.14 0.12 0.10 0.08 ZAF BRA MEX ETH LKA 0.06 ARM JOR IND SLV PER GUM 0.04 0.02 0.00 0.30 0.35 0.40 0.45 0.50 0.55 0.60 Mkt Income Gini
0.65 0.70 Sources: Lus)g (2014) and slides at the end. Note: in these calcula)ons contributory pensions are part of market income and NOT treated as a government transfer. 0.75 39 Argen0na: Rising role of transfers Argen/na(Reduc/on%in%Inequality:%Market%(blue)%vs.%
Redistribu/on%(red)%%
43%%
Redistribu1on&
124%%
58%%
Market&
(24%%
2003$06&
Lus)g, N. and C. Pessino. 2014. 2006$09&
40 Argen-na&Reduc-on$in$Poverty:$Market$(blue)$vs.$
Redistribu-on$(red)$$
$
88%$
110%$
Redistribu1on&
Market&
12%$
&10%$
2003$06&
Lus)g, N. and C. Pessino. 2014. 2006$09&
41 Mexico: Rising role of transfers Mexico: The impact of cash transfers on inequality and poverty, 1996, 2000 and 2010
Net market income
Disposable income
1996
Gini
% change with respect to net market income
Headcount index ($2.5 PPP)
% change wrt net market income
0.522
––
30.2%
––
0.520
-0.4%
29.9%
-1.0%
2000
Gini
% change wrt net market income
Headcount index ($2.5 PPP)
% change with respect to net market income
0.544
––
22.1%
––
0.539
-0.9%
21.6%
-2.3%
2010
Gini
% change wrt net market income
Headcount index ($2.5 PPP)
% change with respect to net market income
0.503
––
13.8%
––
0.495
-1.7%
11%
-20.1%
Campos, R., G. Esquivel and N. Lus)g. 2014. “The Rise and Fall of Income Inequality in Mexico, 1989–2010,” Chapter 7 in Giovanni Andrea Cornia, ed., Falling Inequality in La/n America: Policy Changes and Lesssons, WIDER Studies in Development Economics, Oxford University Press, Thank you! 43 References •
•
•
Azevedo, Joao Pedro, Maria Eugenia Dávalos, Carolina Diaz-­‐Bonilla, Bernardo Atuesta, and Raul Andres Castañeda. 2013. “FiOeen Years of Inequality in La)n America: How Have Labor Markets Helped?” Policy Research Working Paper 6384, The World Bank. Bourguignon, F., F. Ferreira and N. Lus)g. 2005. The Microeconomics of Income Distribu/on Dynamics in East Asia and La/n America, Oxford University Press, Washington, DC. Campos, R., G. Esquivel and N. Lus)g. 2014. “The Rise and Fall of Income Inequality in Mexico, 1989–
2010,” Chapter 7 in Giovanni Andrea Cornia, ed., Falling Inequality in La/n America: Policy Changes and Lesssons, WIDER Studies in Development Economics, Oxford University Press, Oxford, United Kingdom . •
Ferreira, Francisco H.G, Julian Messina, Jamele Rigolini, Luis F. Lopez-­‐Calva, Maria Ana Lugo and Renos Vakis. 2013. “Economic Mobility and the Rise of the La)n American Middle Class.” Washington, D.C: The World Bank. •
Gasparini, Leonardo, Sebas)an Galiani, Guillermo Cruces, and Pablo Acosta. 2011. “Educa)onal Upgrading and Returns to Skills in La)n America. Evidence from a Supply-­‐Demand Framework, 1990–2010.” Policy Research Working Paper 5921, The World Bank. •
•
•
•
•
•
Lopez-­‐Calva, L. F. and N. Lus)g. 2010. Declining Inequality in La/n America: A Decade of Progress?, Brookings Ins)tu)on Press and UNDP. Lopez-­‐Calva, L.F., N. Lus)g, E. Or)z-­‐Juarez. 2014. “Inequality, Mobility and Middle Classes in La)n America.” Mimeo, May. Lus)g, N., L. F. Lopez-­‐Calva, E. Or)z-­‐Juarez. 2014. “Deconstruc)ng the Decline in Inequality in La)n America,” chapter in Devlin, Machinea, Chavarria (eds.), (published in Spanish) Lus)g, Nora. 2014. “Taxes, Transfers, Inequality and the Poor in the Developing World. Round 1.” CEQ Working Paper No. 23, Center for Inter-­‐American Policy and Research and Department of Economics, Tulane University and Inter-­‐American Dialogue Lus)g, N. and C. Pessino. 2014. “Social Spending and Income Redistribu)on in Argen)na in the 2000s: the Rising Role of Noncontributory Pensions,” in Public Finance Review, May 2014, Volume 42, Issue 3 Lus)g, N., C. Pessino and J. Scot. 2014. “The Redistribu)ve Impact of Taxes and Social Spending in La)n America. Special Issue.” Public Finance Review, May, Volume 42, Issue 3. Wang, Yang. 2013. “Decomposing the Changes in Male Wage Distribu)on in Brazil.” Tulane University, Ph.D. field paper. 44 CEQ Teams (Year of Survey; C=consump0on & I=income)(MWB Version) 1.
2.
3.
4.
5.
6.
7.
8.
9.
Argen0na (2009, I): Nora Lus)g and Carola Pessino (CEQ Web Dec 2013) Public Finance Review, May 2014, Volume 42, Issue 3 Armenia (2011; I): Stephen Younger and Artsvi Khachatryan (March 12, 2014; paper) Bolivia (2009; I): Veronica Paz Arauco, George Gray-­‐Molina, Wilson Jimenez and Ernesto Yañez (CEQ Web Dec 2013) Public Finance Review, May 2014, Volume 42, Issue 3 Brazil (2009; I): Sean Higgins and Claudiney Pereira (CEQ Web Dec 2013) Public Finance Review, May 2014, Volume 42, Issue 3 Costa Rica (2010; I): Pablo Sauma and Juan Diego Trejos (February 2014; paper) El Salvador (2011; I): Margarita Beneke, Nora Lus)g and Jose Andres Oliva (March 11, 2014) Ethiopia (2010/11; C): Ruth Hill, EyasuTsehaye, Tassew Woldehanna (April 30, 2014) Guatemala (2011; I): Maynor Cabrera, Nora Lus)g and Hilcias E. Moran (April 13, 2014) Indonesia (2012; C) : Jon Jellema and Mathew Wai-­‐Poi (February 18, 2014) 45 CEQ Teams (Year of Survey; C=consump0on & I=income)(MWB Version) 10  Jordan (2010; C) : Morad Abdel-­‐Halim, Shamma Adeeb Alam, Yusuf Mansur, Umar Serajuddin, Paolo Verme (April 18, 2014) 11  Mexico (2010; I): John Scot (CEQ Web Dec 2013) Public Finance Review, May 2014, Volume 42, Issue 3 12  Peru (2009; I): Miguel Jaramillo (CEQ Web Dec 2013) Public Finance Review, May 2014, Volume 42, Issue 3 13  South Africa (2010; I): Ingrid Woolard, Precious Zikhali, Mashekwa Maboshe, Jon Jellema (May 5, 2014) 14  Sri Lanka (2009/10; C): Nisha Aruna)lake, Gabriela Inchauste and Nora Lus)g (April 8, 2014; paper) 15  United States (2011; I): Sean Higgins, Nora Lus)g, Whitney Ruble and Timothy Smeeding 16  Uruguay (2009; I): Marisa Bucheli, Nora Lus)g, Maximo Rossi and Florencia Amabile (CEQ Web Dec 2013) Public Finance Review, May 2014, Volume 42, Issue 3 •  Research Assistant: Yang Wang, Tulane University 46