Growth with reduction in poverty and inequality: did Brazil show the way?

Abstract

A comprehensive decomposition approach is applied to identify the factors that generated a remarkable change in income distribution, whereby in the a span of a decade, Brazilian inequality fell by one-fifth, and the incidence of poverty declined by two-thirds. It is argued that important elements related to these developments had been in place for some time. These elements included macroeconomic stability, long-standing increases in educational attainment, and favorable demographics in the form of a declining dependency ratio that proved to be both poverty- and inequality-reducing. Robust economic growth during the 2000s and the early 2010s resulted in across-the-board income gains that were widely shared, owing to mechanisms that favored advances at the lower end of the distribution of earnings. Demographics, as well as changes in educational attainment, labor force participation, and lower-skill prices explain most of the significant drop in the headcount ratio, with education and the interaction between economic growth and a rising wage floor accounting for the bulk of the change. The same factors explain up to 85% of the decline in income dispersion that was especially driven by markedly compressed earnings differentials. Human capital accumulation and strong labor market institutions thus stand out as key mechanisms linking economic growth to income distribution.