Labor Market Experience and Falling Earnings Inequality in Brazil: 1995–2012

Francisco H G Ferreira,Julián Messina,Sergio P Firpo

doi:10.1093/wber/lhab005

Abstract

Abstract The Gini coefficient of labor earnings in Brazil fell by nearly a fifth between 1995 and 2012, from 0.50 to 0.41. The decline in other measures of earnings inequality was even larger, with the 90-10 percentile ratio falling by almost 40 percent. Applying micro-econometric decomposition techniques, this study parses out the proximate determinants of this substantial reduction in earnings inequality. Although a falling education premium did play a role, in line with received wisdom, this study finds that a reduction in the returns to labor market experience was a much more important factor driving lower wage disparities. It accounted for 53 percent of the observed decline in the Gini index during the period. Reductions in horizontal inequalities – the gender, race, regional and urban-rural wage gaps, conditional on human capital and institutional variables – also contributed. Two main factors operated against the decline: a greater disparity in wage premia to different sectors of economic activity, and the “paradox of progress”: the mechanical inequality-increasing effect of a more educated labor force when returns to education are convex.

Highlights

Rising income inequality has attracted a great deal of recent attention in both academic and policy circles.1 The sustained rise in wage and income inequality in the United States since 1980 has garnered particular interest, with a large literature debating the relative importance of various contributing factors, such as changes in technology; the role of international trade; changes in the relative supply of skills; and changes in labor market institutions, such as falling unionization rates and real minimum wages
The analysis suggests that, Brazil did experience a large increase in the supply of education, which contributed to a decline in the returns to schooling (López-Calva and Lustig 2010), these falling returns were not the quantitatively most important driver of falling inequality
The first subsection looks at average earnings; the second subsection decomposes changes in the Gini coefficient; and the third subsection considers individual percentiles and three specific percentile ratios

Summary

Introduction

Firpo, and Messina example, claims that “income inequality has increased in most world regions in recent decades, but at different speeds” (Alvaredo et al 2018, 6). The schooling premium did decline but, when the other factors are properly accounted for, its quantitative importance during 1995–2012 is small and statistically insignificant Another two factors acted to partly offset the decline in wage inequality: first, in the presence of convex returns to schooling (which were observed in this study), a broad increase in the educational attainment of the labor force has a mechanical inequality-increasing effect, sometimes referred to as the “paradox of progress” (Bourguignon, Ferreira, and Lustig 2005). On its own this effect contributed a 3.2-point increase in the Gini coefficient for wages over the period.

A Brief Review of the Literature

Data and Descriptive Statistics

Distributional Decomposition Analysis

Results

Conclusions