The End of Inequality?
Inequality, labour markets and social protection
in Latin America
Leonardo Gasparini
Ottawa, May 29, 2013
A presentation with the Canadian Development Economics Study Group
(CDESG) and the International Development Research Centre (IDRC)
Outline
1. Inequality: trends and determinants
2. Labour informality
3. The role of social protection
4. The agenda forward
Remarkable fall in income poverty
50
45
40
35
30
25
20
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Poverty headcount ratio – Poverty line US$ 4 PPP.
Source: CEDLAS (2013).
Some questions
• What is behind the contrast between
the two decades?
• Is the fall in poverty sustainable?
• What are the policy challenges?
Contrast between decades: the key is inequality
Decomposition of changes in poverty
Redistribution effect
Redistribution effect
1.0
0.0
-1.0
-2.0
-3.0
Efecto Crecimiento
Efecto Distribución
Growth
effect
-4.0
Growth
effect
-5.0
-6.0
-7.0
1990s
Source : Cruces and Gasparini (2012).
2000s
Significant fall in income inequality
54
53
52
51
50
49
48
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Gini coefficient – Household per capita income. Unweighted average.
Source: CEDLAS (2013).
2006
2007
2008
2009
2010
2011
Significant fall in income inequality
54
53
52
– Widespread across countries
– Sustained over time (10 years)
– Relatively large
– Contrast with rest of the world
– Contrast with past two decades
51
50
49
48
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
• A break with history?
2003
2004
2005
2006
2007
2008
2009
2010
2011
A side note on these statistics
•
Computed from household surveys with same protocol
•
Main world databases use our indicators for Latin America
•
Cited in papers and the press
•
Used by governments
Why inequality fell in the 2000s?
• Falling wage premium
• Higher employment
• Increase in public transfers
• Demographic factors
Heterogeneous changes in the wage premium
Annual change in skilled/unskilled conditional wage gap
8
6
4
1990s
2
0
Wage premium
-2
2000s
-4
Source: Gasparini, Galiani, Cruces and Acosta (2012).
Not a supply-side story…
Annual change in skilled/unskilled conditional wage gap
8
6
1990s
4
2000s
1990s
2
0
Wage premium
Relative supply
-2
2000s
-4
Source: Gasparini, Galiani, Cruces and Acosta (2012).
Some driving factors

The reforms

Change in relative prices

More active labour policies

Increase in employment

Crises and rebounds
The reforms

1990s: Large reforms: trade and financial liberalization,
privatizations, deregulations, opening up to foreign
investment.

2000s: Small changes: reversals in some countries.

Evidence on the unequalizing impact of the reforms.

Also, probably an “overshooting”: the unequalizing impact
of the reforms loses strength over time.
Change in relative prices

Increase in relative price of commodities  change in
structure of production and employment  change in
wage structure

1990s: production changes toward skill-intensive sectors

2000s: more neutral changes
More active labour policies

Minimum wage, unions, income policies
100
80
60
40
20
0
DOM MEX PRY BOL CRI SVD PAN PER COL VEN GUA CHL HND ECU BRA NIC URY ARG
-20
Change in real value of minimum wage (2002-2010).
Source: ECLAC (2012).
Increase in employment
61
60
59
58
57
56
55
Employment rate. Latin America. Unweighted average.
Source: CEDLAS (2013).
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
54
Large increase in female labour market participation
100
90
Males
80
70
Females
60
50
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1992
1993
1995
1996
1997
1998
1999
2001
2002
2003
2004
2005
2006
2007
2008
2009
40
Brazil. Labour market participation. Adults.
Source: CEDLAS (2013).
Drop in inequality in Argentina, Ecuador, Paraguay,
Uruguay and Venezuela from the early to the mid 2000s:
partially attributed to the recoveries from crises.
0.55
0.50
0.45
0.40
0.35
10
08
06
04
02
00
98
96
94
92
90
88
86
84
82
80
78
76
0.30
74

Crises and rebounds
Strong increase in social spending
350
300
250
200
150
100
50
0
1992
1994
1996
1998
2000
2002
Latin America: Social spending per capita. 1992=100.
Source: own calculations based on ECLAC (2012).
2004
2006
2008
2010
What are the key factors behind these changes?
1. Change in politics
2. Better external conditions (terms of trade,
demand, remittances)
3. Effect of previous policies (reforms, education).
• Still difficult to disentangle
Labour informality
Labour informality
• Pervasive characteristic of Latin American labour
markets.
• Problem per se and a limitation for other policies
(minimum wage, labour protection).
• Key policy target.
Some improvements in the 2000s, but still very high levels
61.5
65
60.3
56.6
60
55
50
45
Early 1990s
Early 2000s
Late 2000s
Informality rate. Social protection definition. All workers. Unweighted mean for Latin America.
Source: CEDLAS (2013).
Higher informality rate for females; convergence in
some countries
Argentina
Brazil
60
70
50
60
50
40
40
30
Female
30
Male
Female
Source: Tornarolli et al (2013) based on SEDLAC.
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0
1994
0
1993
10
1992
10
1993
20
Male
1992
20
Informality and the business cycle
• In most countries the relative size of the
informal sector seems to be counter-cyclical.
• The strong economic expansion of the 2000s
was a relevant driving force of the fall in labour
informality in the region.
Also changes in productive structure
• Changes in the structure of the economy toward
more “pro-formal” sectors (public sector, some
skilled services) contributed to the reduction in
informality.
• In most countries the contribution was significant,
although complementary of a stronger economywide movement toward more formal labour
arrangements.
What to do with informality?
1. More enforcement
2. Increase benefits to informal workers
3. Universal coverage + change in taxation
1. More enforcement
• Some improvements but…
• still difficult
• weak public sector
• large self-employment sector
• may not be optimal
• more enforcement may imply higher
unemployment, at least in low-productivity
sectors
2. Extending benefits
•
Trend in the region toward the extension of social
protection systems to cover the informal workers
 dual system
•
Evidence on
•
poverty and inequality-reducing impact
•
some unwanted outcomes (e.g. increase in informality)
3. Universal coverage
•
•
Radical change to a universal coverage system
Shift of taxation from labour to consumption (or
general rents)
Levy (2009), Levy et al. (2012)
•
•
Does it reduce inequality? VAT maybe more regressive
Is it politically feasible?
3. Universal coverage
•
It requires three politically difficult steps
1.
2.
3.
Unify social benefits
Eliminate labor taxes
Increase VAT rate
•
Difficult to build political alliances
•
Maybe feasible in some countries (e.g. Mexico)
but not in others (e.g. Argentina)
Concluding remarks
• Some improvements since the early 2000s
• Informality is still too high
• Growth will help, but still much room for
policy intervention
• A delicate balance between enforcement,
active policies and incentives.
Social protection
Expansion in social protection
• Started in the 1990s and increased in the 2000s
• Main innovations:
• Conditional cash transfer programs
• Non-contributory pensions
Expansion in social protection
• Reasons:
• Increase in inequality and poverty in the 1990s 
• Increased awareness for social issues
• Improvement in fiscal situation
• Better technology to implement and control
• Support from international organizations,
academia
• Imitation effect
Programs are well-targeted
Argentina - AUH
Brasil-Bolsa Familia
Chile - Subsidio familiar
60
60
60
50
50
50
40
40
40
30
30
30
20
20
20
10
10
10
0
0
1
2
3
4
5
Ecuador - BDH
0
1
2
3
4
5
Mexico - Oportunidades
60
60
50
50
40
40
30
30
20
20
10
10
0
0
1
2
3
4
5
3
4
5
3
4
5
Panama - Red de oportunidades
80
70
60
50
40
30
20
1
2
3
4
5
Paraguay -Tekopora
10
0
1
2
3
4
5
Peru - Juntos
1
Uruguay - Asignación familiar
60
60
60
50
50
50
40
40
40
30
30
30
20
20
20
10
10
10
0
0
1
2
3
4
Fuente: Cruces y Gasparini (2012).
5
2
0
1
2
3
4
5
1
2
Significant (but not huge) impact on inequality
Reduction in decile income ratio (10/1) (in %)
Room for expansion?
• Gasparini, Cruces and Jaume (2012):
• simulation of an expansion of the cash transfer
programs in all Latin American countries
• estimation of the impact on poverty, inequality
and the fiscal cost.
Poverty headcount ratio under growth (2% annual)
and three social protection scenarios
16
14
12
10
8
6
4
2
0
2010
2015
Only grow th
2020
Grow th + SP 0.25
Grow th + SP 0.5
2025
Poverty headcount ratio under growth at annual 2%
and three social protection scenarios
16
14
12
10
8
6
4
2
0
2010
2015
Only grow th
2020
Grow th + SP 0.25
Grow th + SP 0.5
2025
Some conclusions
• Expanding the social protection net to almost
eliminate extreme poverty is within reach in
some Latin American nations in the short run,
and in several countries in the medium run.
•In contrast, the poorest nations in the region
would find difficult to eliminate extreme poverty
in the near future.
Some concerns
• The expansion of the social protection may induce
unwanted changes in
• Labour supply
• Informality
Incentives at work?
Transitions to formality : Informal workers in poor households
30
Before-program
25
20
With children
15
10
Without children
5
0
2005-2006
2006-2007
Source: Gasparini and Garganta (2012).
2007-2008
2008-2009
2009-2010
2010-2011
Incentives at work?
Transitions to formality : Informal workers in poor households
30
Before-program
After-program
25
20
With children
15
10
Without children
5
0
2005-2006
2006-2007
Source: Gasparini and Garganta (2012).
2007-2008
2008-2009
2009-2010
2010-2011
Concluding remarks
• New social programs seem to be well-established.
• There is fiscal room for some expansions.
• A key policy challenge is how to expand them
without affecting labour markets incentives.
The agenda forward
The agenda forward
Understanding changes in poverty and inequality

What is behind the fall in poverty and inequality?

What are the relative contributions of the different
driving factors?

Politics, external conditions or other factors?

What was the role of the commodity price boom?

… market reforms?

… demographic changes?
The agenda forward
Assessing policy impact

What is the role of active labour policies?

Which labour interventions are more effective?

What is the contribution of conditional cash
transfers and non-contributory pensions?

What is the best design? How to improve it?

How to promote gains in productivity?
The agenda forward
Some concerns for the future
•
Are the social gains sustainable under different
external conditions?
•
Are we affecting growth (and hence redistribution)
in the long-run? (incentives)
•
How worrying are the issues of education quality
and school segregation?
•
Is the expansion in social spending fiscally
sustainable?
The agenda forward
Labour informality
•
Why is so resilient?
•
Which is the best policy approach?
•
Wait. Growth will take care.
•
More enforcement
•
Dual system
•
Universal coverage and change in taxation
The agenda forward
Gender and demographic issues
•
What is the impact of the increasing female labour
participation?
•
•
How gender gaps are changing? Not only in wages
•
Entrepreneurship
•
Labour informality
Why are fertility rates among the poor falling and
how this affects the labour market, poverty and
inequality?
Are we prepared?

Need more and better data.

Need more research efforts.

Need to build capacity.

Need more dialogue with political actors.
Thank you!
For more information:
CEDLAS: www. cedlas.econo.unlp.edu.ar
LaborAL: www.Labor-AL.org