Accounting for Mexican Income Inequality During the 1990s

Rafael De Hoyos

doi:10.25071/1874-6322.30577

Abstract

The present study measures the extent to which income disparities in Mexico can be attributed to sectoral asymmetries and differences in skill endowments. The results show that close to 40 per cent of per capita household income inequality in Mexico during the 1990s is attributable to incomes derived from formal self-employment; this refers to entrepreneurial activities, an income factor rarely analyzed in the inequality literature. We show that education endowments (skills) are unevenly distributed among the Mexican population, with positive shifts in the market returns to schooling being associated with increases in inequality. Asymmetries in the distribution of education endowments explain around 20 per cent of overall household income disparities in Mexico during the 1990s. Moreover, the results show that the proportion of inequality attributable to education endowments increased during stable periods and reduced during the 1994--1995 economic crisis. This pattern is mostly explained by shifts in returns to schooling rather than changes in the distribution of skills. Applying the same techniques to decompose within-sector income differences, the study show that skill endowments can account for as much as 25 per cent of differences in earnings, but as little as 10 per cent of income dispersion among formal self-employed workers.

Highlights

During the 1990s, Mexico experienced profound economic changes
A considerably large literature had concentrated its analysis in the impact of trade reforms on relative wages in the manufacturing sector, using the methodology presented in this paper, we can quantify the proportion of total household income inequality that can be explained by relative wages in the manufacturing sector
Our results show that the sectoral redistribution caused by the combination of the peso devaluation and the enactment of North American Free Trade Agreement (NAFTA) had as a consequence an increase in the proportion of inequality accounted for by skill endowments in the tradable sector

Summary

Introduction

During the 1990s, Mexico experienced profound economic changes. The decade started with a new economic order placing the market at the center of the development strategy and reducing the role played by the state. Other studies that use decomposition methods in order to idenitify the factors that account for Mexican income inequality during the late 1980s and early 1990s had stressed the importance played by the distribution of skills in reshaping distribution (Lopez-Acevedo, 2001 and Legovini et al, 2005) Another strand of the literature had concentrated in the impact that trade liberalization has had on relative wages in the manufacturing sector. A considerably large literature had concentrated its analysis in the impact of trade reforms on relative wages in the manufacturing sector, using the methodology presented in this paper, we can quantify the proportion of total household income inequality that can be explained by relative wages in the manufacturing sector Uncovering these issues can inform policy makers on the extent to which household income inequality can be deemed to be a problem associated with the distribution of skills or an outcome of sectoral asymmetries.

Macroeconomic Changes

Inequality Levels

Methodological Aspects

Non-Parametric Approach

Semi-parametric approach

Summary and Conclusions