Income inequality fell in most of Latin America in the 2000s after rising in the 1990s. In this paper, Nora Lustig, Luis Lopez-Calva, and Eduardo Ortis-Juarez investigate why.
Using original data and data from others, the authors find two main factors in the decline: a smaller difference in the price of skilled labor relative to unksilled and higher and more progressive government transfers. The reduction in the skill premium is due to changes in the supply and demand of labor, rising minumum wages, and unionization, to varying degrees across countries.
The factors lessening inequality should not, the authors argue, be taken for granted. Continued good policy will be necessary to sustain the improvements.
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