Friday, July 23, 2010

Skills and income inequality

Michael Walton has nice piece on how inequality is reduced in Brazil:

  • A recent book from the UNDP helps us see why. The inequality decline matters: it looks like a turning point, even though there is a long way to go. And it has already made a large difference to poverty reduction. The Brazil study estimates that two-thirds of a substantial poverty decline between 2001 and 2007 was due to falling inequality. Growth would have had to be four percentage points higher if inequality had not changed. That kind of contribution to reducing poverty would be of great significance in India.
  • What was going on? The two largest influences in Brazil, and elsewhere, were direct transfers and reductions in labour earnings differentials. Government transfers to households accounted for about half the Brazilian inequality decline, mostly due to old-age pensions and a cash transfer to the poor (Bolsa Família, which is conditional on children going to school, health check ups and an assets-based means test—like India’s Below Poverty Line measure). The Bolsa Família was substantially expanded under the Left-leaning (but largely pro-market) administration of President Lula da Silva.
  • The other half of the decline mainly came from reduced wage differentials, especially linked to skills, and also to inter-regional and inter-industry wage differences. The fall in skill differentials represents a reversal of earlier increases. When Latin America opened up in the 1980s and 1990s, most countries experienced rises in relative wages, especially of college-educated individuals, as the economic restructuring increased the demand for skills. Only in the 2000s are the benefits of early expansions in education being reaped, a product in many countries of the return to democracy in the 1980s.

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