Working Papers

Working Paper guidelines

• At least one author should be an III researcher or Faculty Associate.

• Submissions are also welcome from Visiting Fellows, Visiting Professors, and Doctoral Students, when accompanied by a brief supporting statement from an III researcher or Faculty Associate. 

• The expectation is that the person writing the supporting statement has reviewed and vouches for quality of the submission to the working paper series.

How to submit a paper for consideration

• Submit your paper to iii.comms@lse.ac.uk.

• Your paper will then go through a process of light peer-review to ensure quality standards are met. We may suggest that your paper is better suited to alternative outlets, or ask for a revised version before publication in the working paper series.

• If accepted, the paper will have the III working paper series cover pages added and will be sent to LSE Research Online to be published online.

• The paper will be added to the III’s working paper page on the website and promoted on our social media channels and newsletter.

Inherited wealth in post-apartheid South Africa: new perspectives from probate records

This chapter uses a novel data source – probate records – to develop an original account of the scale of the racial wealth divide in South Africa and its geographic dimensions. The results provide a sobering perspective on the scale of the racial wealth divide 30 years after the end of Apartheid. We estimate that 45% of White South African adults own inheritable wealth of at least R.250,000, compared to 3% of Black, 9% of Coloured, and 23% of Asian South Africans, and these gaps have narrowed only modestly between 2009 and 2019. We compare these results to estimates from survey data and discuss the nature of the probate source biases and interpretation. We also show that Black South Africans leaving estates are primarily dwellers in former Apartheid-era townships, and to a lesser extent, Homelands, with 42% resident in townships and 17% in Homelands at death, suggesting that this Black formal wealth-owning upper-middle class are predominantly the owners of assets acquired during the Apartheid-era. This points to the limited extent to which South Africa’s Black upper and middle classes have bought into the historically White-owned asset stock. It also suggests that, much as in other parts of the world, the wealth distribution beyond the apex owes much to the structure of home ownership and geographically uneven house price appreciation.

Download paper

Biases in inequality of opportunity estimates: measures and solutions

In this paper we discuss some limitations of using survey data to measure inequality of opportunity. First, we highlight a link between the two fundamental principles of the theory of equal opportunities – compensation and reward – and the concepts of power and confidence levels in hypothesis testing. This connection can be used to address, for example, whether a sample has sufficient observations to appropriately measure inequality of opportunity. Second, we propose a set of tools to normatively assess inequality of opportunity estimates in any type partition. We apply our proposal to Conditional Inference Trees, a machine learning technique that has received growing attention in the literature. Finally, guided by such tools, we suggest that standard tree-based partitions can be manipulated to reduce the risk of compensation and reward principles. Our methodological contribution is complemented with an application using a quasi-administrative sample of Italian PhD graduates. We find a substantial level of labor income inequality among two cohorts of PhD graduates (2012 and 2014), with a significant portion explained by circumstances beyond their control.

Download paper

Tax disincentives to formal employment in Latin America

To finance increased public spending and social programs, Latin America's tax systems need to develop further. Yet taxation can reduce the tax base by discouraging formal employment. Evidence on the intensity of the problem is limited and tends to focus on specifically large reforms of the tax system. Conversely, and to improve external validity, we study whether routine changes in tax policies also alter labor market formalization. Our approach is based on grouped-data estimations of formal employment responses to policy changes. We exploit tax variation across three countries (Bolivia, Ecuador and Colombia) and three periods (2008, 2014/15, 2019). We use precise calculations of counterfactual tax burdens when moving from informal to formal jobs, i.e. formalization tax rates (FTRs). For most countries and pairs of years, FTRs have a negative and significant effect on formal employment, particularly when wages are held constant across periods – in order to extract the pure policy effect – and in a series of sensitivity checks.

Download paper

Wealth and class analysis: exploitation, closure and exclusion

Wealth inequalities are increasingly prominent in contemporary societies, yet they have not been systematically addressed by sociological class analysis. Yet, class analysis should have a lot to offer: In the literature on wealth inequality, wealth is often approached as a unidimensional distribution – a quantity one can possess more or less of, crystallized in notions of the Top 1%. In this theoretical reflection, we discuss ways in which class analysis can address the gravity of wealth inequality by returning to the origins in the thinking of Marx and Weber, where capital accumulation and property organization were given central stage. Drawing on more recent contributions from Bourdieu, and integrating insights from political economy, theories of racial capitalism and feminist perspectives, we outline ways to enrich class theory through attention to housing, finance, business, and debt. Our intervention allows class analysis to embrace accumulation, exploitation, closure and exclusion making it fit for purpose to address 21st-century social changes.

Download paper

Specific egalitarianism? Inequality aversion across domains

An individual’s inequality aversion (IA) is a central preference parameter that captures the welfare sacrifice from exposure to inequality. However, it is far from trivial how to best elicit IA estimates. Also, little is known about the behavioural determinants of IA and how they differ across domains such as income and health. Using representative surveys from England, this paper elicits comparable estimates of IA in the health and income domains using two alternative elicitation techniques: a direct trade-off and an indirect “imaginary-grandchild” approach that results from the choices between hypothetical lotteries. We make three distinct contributions to the literature. First, we show that IA systematically differs between income and health domains. Average estimates are around 0.8 for income IA and range from 0.8 to 1.5 for health IA. Second, we find that risk aversion and locus of control are central determinants of IA in both income and health domains. Finally, we present evidence suggesting that the distribution and comparison of IA vary depending on the elicitation method employed.

Download paper

What do we know about wealth inequality in Brazil?

Wealth inequality has gained importance in the international debate following the publication of Capital in the 21st Century, by Thomas Piketty, which contains systematic data on the size and evolution of the phenomenon in advanced economies over the last few centuries. In particular, Piketty's research reveals an important decrease in wealth concentration throughout the 20th century, a decrease that has not been sustained in the first decades of the 21st century. What can be said about the levels and historical trajectory of wealth inequality in Brazil, one of the world’s most unequal countries? We investigated all available estimates since the 17th century. The work is organized based on the different sources and approaches used to construct the estimates, which cannot be directly obtained from national household surveys or censuses. Two conclusions stand out: a) wealth concentration presents extreme levels and notable stability over time, despite profound transformations in the composition of assets; and b) all available estimates have significant limitations. The availability of adequate public data, along with improvements in the procedures employed so far, is essential for the development of a literature on wealth inequality in the country – the first step towards effective public engagement with the issue.

Download paper

The political impact of inflation: a survey experiment

The early 2020s saw a spike in inflation across much of the advanced world, with pervasive economic consequences. There is strong evidence that economic shocks generally have political consequences, but few studies have specifically focused on inflation. In this paper, we address this gap using an original, pre-registered survey experiment in the United Kingdom, a country which saw the highest consumer price inflation in 40 years and a major cost of living crisis. First, we describe how individuals, on average, are only neutral in their confidence in the Bank of England’s and economists’ ability to tackle inflation. The population is even more pessimistic regarding the government’s abilities. Second, using an experimental survey vignette, we causally identify the effect of reminding and/or informing participants about the high levels of inflation. While our treatment shifts inflation expectations, we find no evidence that it reduces trust in government, the bank of England, nor economists more generally. Instead, we find weak evidence that respondents blame corporations. Inflation also makes citizens less likely to support public sector pay rises although we find no effect on authoritarianism, redistribution attitudes, attitudes towards overseas trade, or optimism towards the future.

Download paper

The impact of austerity on mortality and life expectancy

This paper studies the impact of austerity measures introduced by the UK government after 2010 on life expectancy and mortality. We combine administrative data sources to create a panel dataset spanning from 2002 to 2019. Using a difference-in-differences strategy, we estimate the effect of cuts to welfare benefits and changes in health expenditure on life expectancy and mortality rates. Our findings indicate that these austerity measures reduced life expectancy by 2.5 to 5 months by 2019. Women were nearly twice as affected as men. The primary driver of this trend is cuts to welfare benefits, although healthcare spending changes have a larger effect per pound spent. The results suggest that austerity policies caused a three-year setback in life expectancy progress between 2010 and 2019. This is equivalent to about 190,000 excess deaths, or 3 percent of all deaths. Taking into account the years of life lost, we conclude that the costs of austerity significantly exceeded the benefits derived from reduced public expenditure.

Download paper

Firms and inequality in Latin America
The relationship between firms and inequality has been a focus of recent attention globally. This chapter summarizes basic facts about this relationship for Latin America. Unlike advanced economies where superstar firm growth has prompted concerns over disproportionate income growth at the top, the facts we summarize illustrate that the main concern for Latin America is the extreme prevalence of tiny businesses whose workers and owners tend to populate the bottom income segments. The empirical likelihood that these businesses improve their productivity and grow to hire more workers and pay better wages is also very low. The region displays a deficit of employment generation in SMEs, by contrast to both microbusinesses (including self-employment) and large corporations. While the former tend to remunerate both workers and owners with very low incomes, the latter pay high wages but also exhibit low labor shares.

Download paper

Weak parties and the inequality trap in Latin America 

Download paper

The spatially uneven diffusion of remote jobs in Europe 

The paper maps the spatially uneven diffusion of working from home across 30 European countries during the COVID-19 pandemic. We summarise the determinants of remote working and show that its uptake was lower than in the US, and substantially uneven across/within countries, with most remote jobs concentrated in cities and capital regions. We then apply a variance decomposition procedure to investigate whether the uneven distribution of remote jobs can be attributed to individual or territorial factors. Results underscore the importance of composition effects as, compared to intermediate-density and rural areas, cities hosted more workers in occupations/sectors more amenable to working remotely. Overall, findings highlight how working from home is unlikely to substantially alter the current patterns of spatial inequality between core urban areas and peripheral rural regions.

Download paper

Wealth inequality and stratification by social classes in 21st-century Europe

Wealth is a central determinant of life chances and intergenerational status persistence in modern societies. Yet, sociologists traditionally overlooked its role in class measurement and inequality, while most economists focused on the elites. This article reconciles sociological and economic perspectives on class analysis by examining the relationship between classes and wealth inequality versus income. Drawing from the Luxembourg Wealth Study (2002-2018) in five European countries, we test whether occupational classes, based on the entire division of labour, keep up with rising economic inequality trends. In contrast to bold claims on class death or decomposition, inequality of outcomes in wealth accumulation is firmly rooted across occupational classes in contemporary capitalism, potentially harming future equal opportunity and social mobility. Still, occupational classes better capture between-group income inequality and stratification than wealth, emphasising the importance of economic resources beyond labour market attachment that spark advances in social class theory and measurement.

Download paper

Analysing inequalities within the LSE student body: bringing social class into the mix

We report the results of a study of LSE home undergraduate students which addresses the significance of social class background in shaping a range of student outcomes. We explore how class background and other sociodemographic variables affect access (who gets in), study choice (who studies what), attainment (how students perform in summative assessment), and satisfaction (how students rate their programme). We show that parental class background plays a major role across all these dimensions and is a major force shaping LSE undergraduate student outcomes. This is evident from observing raw bivariate associations and remains true when we report linear regression models controlling for numerous other socio-demographic and institutional factors. We also demonstrate powerful intersectional associations, especially with race, and also with declared disability status. Our results underscore the need to take social class seriously in the analysis of the undergraduate experience, both in analytical and in policy terms.

Download paper

The interaction of economic and political inequality in Latin America

We investigate how economic inequality can persist in Latin America in the context of radical falls in political inequality in the last decades. Using data from Colombia, we focus on a critical facet of democratization - the entry of new politicians. We show that initial levels of inequality play a significant role in determining the impact of political entry on local institutions, policy, and development outcomes, which can impact future inequality. A vicious circle emerges whereby policies that reduce inequality are less likely to be adopted and implemented in places with relatively high inequality. We present evidence that this is caused both by the capture of new politicians and barriers to institution and state capacity building, and also by the fact that politicians committed to redistribution are less likely to win in relatively unequal places. Our results, therefore, help to reconcile the persistence of economic inequality with the new political context.

Download paper

Inequality in the early years in LAC: A comparative study of size, persistence, and policies

Gaps in child development by socioeconomic status (SES) start early in life, are large and can increase inequalities later in life. We use recent national-level, cross-sectional and longitudinal data to examine inequalities in child development (namely, language, cognition, and socio-emotional skills) of children 0-5 in five Latin American countries (Chile, Colombia, Mexico, Peru and Uruguay). In the cross-section analysis, we find statistically significant gaps with inequality patterns that widely differ across countries. For instance, gaps in language and cognition for Uruguay and Chile are much smaller than those for Colombia and Peru. When turning to the longitudinal data, average SES gaps are similar to those of the cross-section in language but differ substantially in cognition, mainly in Uruguay where they emerge as more unequal when cohort effects do not operate. Importantly, we also find that the ECD gaps found at early ages (0-5), still manifest 6-12 years later in almost all locations and realms in which we have measures of early child development, but they do not increase with age. Results are robust to using different measures of inequality (income and maternal education). Gaps are smaller but generally remain when adjusting for possible explanatory factors (e.g., family structure, parental education, geographic fixed effects). To reduce ECD inequality and promote equality in later life outcomes, policymakers should look to implementing evidence-based interventions at scale to improve developmental outcomes of the most disadvantaged children in society.

Download paper

Tax flight? Britain’s wealthiest and their attachment to place

Britain’s policymakers, like many around the world, are concerned about the emigration of top taxpayers in response to tax policy. Existing evidence on this kind of tax flight is either quantitative or comes from a handful of high-profile individuals issuing politicised warnings about tax migration in the media. We know little about how the wealthy actually consider their tax burden when making decisions about where to live. This report summarises new qualitative research exploring the migration decisions of Britain’s wealthiest and highest earning individuals. Specifically, we draw on in-depth interviews with 35 individuals, all of whom were in the top 1% of the distribution by income and/or wealth, to explore whether top earners and wealth holders in Britain would consider migrating for tax reasons and what they value most when deciding where to live.

Download paper

Behavioral responses to wealth taxation: evidence from a Norwegian reform

We analyze behavioral responses to wealth taxation, estimating the causal effects of a unique municipal wealth tax reform in Norway. We exploit variation from the single-period municipal reform reducing the marginal tax rate (MTR) on wealth exclusively in the northern Norwegian municipality of Bø from 0.85% to 0.35%, since 2021. Mimicking the behaviour of a tax haven, Bø represents the first municipality to unilaterally reduce the municipal wealth tax rate since the establishment of wealth taxation in Norway in 1892. We document a significant 66.6% increase in average taxable wealth in response to a 1 percentage point drop in the wealth tax rate. The elasticity of taxable wealth increases to 71.6% when focusing exclusively on wealth taxpayers. We also estimate a significant but more modest 10.3% jump in the weighted mass of wealth taxpayers in the treated municipality. Non-real effects of the reform dominate: mobility of wealthy taxpayers appears as the major behavioral response to the change in the net tax rate, accounting for a staggering 79% of the post-treatment total net wealth in the treated municipality (up from 19% in the pre-reform period). These results emerge in a context with third-party reported wealth data with negligible measurement error, limited evidence of bunching, highly enforced residence-based wealth taxation, and a low degree of out-migration rates.

Download paper

Degrees of vulnerability to poverty: a low-income dynamics approach for Chile

I propose an empirical framework to identify different degrees of vulnerability to poverty using two vulnerability lines that classify currently non-poor people into risk groups: high, moderate and low risk of falling into poverty in the next period. The latter corresponds to the income secure middle class. My approach makes two contributions. First, it extends recent research that defines the middle class using a vulnerability threshold by introducing a new subdivision of the vulnerable group that would be useful in practice for public policy objectives. Second, it uses two models to predict both the probability of entering poverty and household income as part of the estimation procedures. The former controls for initial conditions effects and attrition bias, and the latter addresses the retransformation problem. I apply my approach to Chile using longitudinal data from the P-CASEN 2006-2009. The resulting vulnerability cut-offs (using the upper-middle-income country poverty line) are $20.0 per person per day for the low vulnerability line and $9.9 pppd for the high vulnerability line (both in 2011 PPP). My vulnerability lines differ significantly from those estimated in previous research on vulnerability and the middle class in Latin America. I argue that previous research has underestimated the size of the population at risk of falling into poverty and overestimated the growth of the middle class. Misclassifying the vulnerable as middle class limits their access to anti-poverty policies.

Download paper

Income inequality in the 21st century Poland

This paper combines micro-level tax data, household surveys and national accounts data to provide consistent series of income distribution in Poland over the 2000-2018 period. We find that inequalities in Poland are one of the largest in Europe. In 2018, the share of pretax and pre-transfer income accrued to the top 10% is 37.4%, to the next 40% is 41.1%, and to the bottom 50% is 21.5%. The top 1% earns 13.4% of the total income. The increase in income inequality during this period was largely driven by high business incomes in top income shares. The extent of redistribution in Poland is modest. The tax system is regressive at the top of the income distribution due to lower taxation of business income and the low burden of social contributions. Finally, we show that top income groups are dominated by business owners, males, and big city dwellers, and these groups have been the largest beneficiaries of Poland’s strong growth since 2000. Gender inequality has been high and stable in Poland, with a steeply decreasing female share with income rank (e.g. the share of females in top 0.1% group was 18% in 2018).

Download paper

Opting out from public services and the social contract in Latin America

The seemingly upward trend in opting out from public services and the segregation of income groups in public and private education and health systems has raised concerns about the future of an already fragmented social contract in Latin America. In this chapter, we examine the evolution of the use of private education and private health insurance in selected countries during the first two decades of the 2000s. We also examine the socio-demographic correlates of the decision to opt out, and the association it has with attitudes that are relevant to understand the foundations of the social contract in the region. Overall, the evidence suggests that scholars’ concerns about the fragility of the social contract are justified, but with some nuances. Wealthy households are mostly opting out of the public education system, and the middle-class is split with a substantial proportion of households opting for private schools. On the other hand, opting out from public health is only prevalent among wealthy households, and even within that group the share of households who are paying for a private health insurance is much smaller than the share of households who opt for private education. For both policy domains, however, we find that people who use private services have worse evaluations of public services, express less support for the public provision of those services, and more generally, are less supportive of redistribution compared to people inside the public systems. We discuss the implications of these descriptive statistics for the sustainability of the public provision of services and the social contract.

Download paper

Gender inequality in Latin America and the Caribbean

This chapter examines gender inequality focusing on two critical spheres in which gender inequality is generated: education and work. Our objective is to provide a current snapshot of gender inequality across key indicators as well as a dynamic perspective that highlights successes and failures. We facilitate a cross-country comparison as well by grouping countries within Latin America by their level of economics development and drawing comparisons with countries outside the region. Finally, we reflect on differences in the ways that gender inequalities play out across different socio-economic groups, particularly those that highlight other sources of inequality.

Download paper

Redistribution, horizontal inequity, and reranking: direct taxation in the UK, 1977–2020

We decompose the redistributive effect of direct taxes into vertical, horizontal, and reranking components applying the methods of Urban and Lambert (Public Finance Review, 2008). In the first such application to the UK, and using yearly data covering 1977–2020, we find that redistributive effect increased over the period. However, there is no clear trend in horizontal inequity and this component forms a very small fraction of total redistributive effect by comparison with reranking and especially vertical components. It is also the vertical component that best tracks trends in redistributive effect. We give specific attention to the choice of the bandwidth used to define ‘close equals’ in terms of pre-tax income. We also show that implausible estimates of the horizontal inequity component arise for some years regardless of bandwidth used.

Download paper

Does global warming worsen poverty and inequality? An updated review

We offer an updated and comprehensive review of recent studies on the impact of climate change, particularly global warming, on poverty and inequality, paying special attention to data sources as well as empirical methods. While studies consistently find negative impacts of higher temperature on poverty across different geographical regions, with higher vulnerability especially in poorer Sub-Saharan Africa, there is inclusive evidence on climate change impacts on inequality. Further analyzing a recently constructed global database at the subnational unit level derived from official national household income and consumption surveys, we find that temperature change has larger impacts in the short term and more impacts on chronic poverty than transient poverty. The results are robust to different model specifications and measures of chronic poverty and are more pronounced for poorer countries. Our findings offer relevant inputs into current efforts to fight climate change.

Download paper

Spatial inequalities in Latin America: mapping aggregate to micro-level disparities

This paper comprehensively examined the various scales at which spatial inequalities manifest in the LAC region. Using information from the Luxembourg Income Study (LIS) database we were able to decompose and compare inequality between LAC countries and high-income countries in a within large urban areas, smaller urban areas and rural areas component and a between component for these three groups. The analysis reveals, perhaps unsurprisingly, that Latin America is more unequal in all of these spatial dimensions. However, it also revealed that in LAC, within small urban areas inequality is the most important term. This is consistent with the results of Ferré, et al. (2012) and ECLAC (2010, 2016). It implies that more emphasis should be placed on poverty rates in smaller urban areas and not just large metropolitan areas. Also, a prominent feature of LAC inequality compared to developed countries is the wide gap between average per capita incomes in rural areas compared to urban areas and, to a lesser extent, between small and large urban areas. 

Download paper

Education inequalities in Latin America and the Caribbean

Education is a crucial asset for a country’s economic prospects and for its inhabitants. In addition to its direct impact on growth via the accumulation of human capital, it is a critical ingredient in producing an informed citizenry, enhancing their ability to obtain and exert human and political rights and their facility to adapt to changing environments (generated by, e.g., technological or climatic change) among other benefits. In this chapter, we study education inequality in LAC (both in quantity and quality), assess how it emerges and amplifies or dampens existing inequalities, and examine the interaction of education inequality with other forms of inequality, primarily income and labor market outcomes. Our analysis is based on primary data from multiple sources.

Download paper

Health systems and health inequalities in Latin America 

In this chapter we categorise the health systems of Latin America based on how segmented their health insurance coverage is. Except for Brazil, Cuba, and Costa Rica which conform relatively well to a traditional Beveridge system, the health systems of most countries share characteristics of Bismarckian and Beveridge traditional systems. 

Download paper

Preferences for redistribution in Latin America

This chapter examines the redistributive preferences of Latin Americans and investigates the factors that shape them. Using a detailed survey in eight Latin American countries, the study sheds new light on redistributive preferences and explores which aspects of redistribution are more popular and among which groups. The roles of selfinterest, perceptions of inequality, values, and the relationship between citizens and the public sphere in shaping attitudes to redistribution are discussed.

Download paper

Inequality and market power in Latin America and the Caribbean

Firms’ market power may exacerbate income inequality. We investigate this relationship among firms in Latin America and the Caribbean (LAC), where this phenomenon remains understudied. We use firm-level data for formal firms in 16 countries in LAC and 31 peer economies with similar levels of GDP per capita but much less inequality. We study 1) The extent and dispersion of market power among LAC’s firms compared to firms in peer economies; 2) the relationship between market power and the labor share of revenue at the firm level; and 3) the implications of that relationship for the aggregate labor share of income, which depends on the joint distribution (across firms) of market power, the labor share, and firms’ size. Markups (markdowns) measure product (labor) market power. Our results indicate that the average markup in the region is 20 percent above marginal costs, while average wages are 46 percent below the marginal revenue product of labor. The negative relationship at the firm level between the labor share and combined market power is driven by labor rather than product market power. Finally, we show that labor market power is more pronounced among larger firms, magnifying the effect of market power on the aggregate labor share and income distribution. However, there is no indication that market power is more acute or dispersed in LAC than in its peers, nor does it appear to induce more inequality than in those countries.

Download paper

Distributional effects of taxation in Latin America

This chapter analyzes the incidence on income distribution by a comprehensive array of direct and indirect taxes in ten Latin American countries circa 2018. The study finds that although there is a significant heterogeneity, the redistributive impact is equalizing for direct taxes and unequalizing for indirect taxes. Overall, redistribution through taxes, without accounting for spending effects and interactions, is slightly equalizing for some countries and unequalizing for others, but the burden on the poor is high and even higher than on the rich. This is mainly a consequence of the high share of indirect taxes in the tax structures, and of low personal income tax collection and coverage. The inclusion of the redistributive effect of the corporate income tax contributes to improve redistribution and accounts for better comparison with the redistributive impact in more developed countries, where dividends are taxed heavily with personal income taxes rather than corporate income taxes as in Latin America. High levels of evasion and informality make payroll taxes more regressive in integrated labor markets with high informality, but make indirect taxes less regressive, since the poor pay little or no indirect taxes on some of their purchases.

Download paper

Calculating the redistributive impact of pension systems in LAC

This paper examines the implicit subsidies within pension systems across Latin America and the Caribbean (LAC) region. We first calculate the theoretical benefits of pension for hypothetical workers in 25 countries in LAC. We show that, on average, LAC's pension systems are subsidized, as they provide pensions above what workers would have obtained by investing pension contributions in a safe asset. Similarly, pension systems are designed to be progressive by offering higher replacement rates (pensions relative to earnings) for low-income workers. Despite this progressivity, in some countries, absolute subsidies could be higher for high-income workers. This occurs because the cost of one percentage point of the replacement increases with the average pension. Second, using data from social protection surveys, we estimate the incidence of pension systems in five LAC countries. We show that, on average, all five systems provide important subsidies to those workers who obtain a pension. However, given the high levels of informal work, in some countries, those subsidies are highly concentrated among high-income workers. Variation is large across countries. The three highest labor income deciles concentrate 70-95% of all subsidies in defined benefit systems such as Paraguay and Colombia. In defined contribution systems, subsidies are much more progressive, but still, because low-income workers do not qualify for minimum pensions, between 50-60% of subsidies concentrate in the high-income deciles. Countries like Chile, with explicit subsidies targeted at the bottom of the income distribution, obtain a more progressive distribution of subsidies. Because of relatively low participation rates, women have a weaker link with the pension system. They are also less likely to benefit from implicit subsidies. Finally, we show that non-contributory pensions, if well-targeted, largely improve the redistributive properties of pension systems in LAC.

Download paper

Cash transfers, poverty, and inequality in Latin America and the Caribbean

We assess the non-contributory cash transfer systems in 17 Latin American and Caribbean countries to identify factors that keep them from reducing poverty and inequality. To perform this assessment, we analyze three dimensions of size (number of beneficiaries, size of transfer per beneficiary, and size of total budget) and three dimensions of targeting (coverage, leakage, and quality of demographic targeting). We identify 67 programs, which fall into three broad categories: conditional cash transfers, non-contributory pensions, and other transfers. We use an international poverty line of 6.85 dollars PPP per day (similar to the average national poverty line of upper middle-income countries), and adjust survey weights to correct for the fact that household survey data often underestimates the official number of transfer beneficiaries compared to administrative sources. We show that two key factors limit the effect of cash transfer programs on poverty and inequality: the small size of their transfers and their historic undercoverage of the population living in poverty. Transfers represent approximately 33% of the poverty gap. Additionally, only 55% of the population in poverty benefits from these programs. Forty-one percent of people living in households that receive at least one non-contributory transfer are above the poverty line. Children and Indigenous people are underrepresented, relative to their poverty rate, in the rosters of beneficiaries. Brazil, Suriname, Argentina, Chile, Costa Rica, Panama, and Uruguay consistently earn the highest scores across the assessment categories. Our policy recommendations include: (i) intensifying efforts to increase coverage among the poor, using modern poverty mapping techniques along with active, on-the-ground searches and (ii) recertifying eligibility for transfer programs more frequently by using highly interoperable administrative data and social registries. Both efforts are needed to create more efficient income protection systems that address both structural and transient poverty.

Download paper

Fiscal policy, income redistribution, and poverty reduction in Latin America

This paper uses standard fiscal incidence analysis to study how much income redistribution and poverty reduction are accomplished through the fiscal system in eighteen Latin American and Caribbean (LAC) countries. We show there is considerable heterogeneity in the income inequality and poverty-reducing power of LAC fiscal systems. While all LAC fiscal systems reduce income inequality, fiscal systems in nine LAC countries are poverty-increasing, and this startling characteristic has not improved over time. When analyzing specific fiscal elements, we find that direct taxes, direct transfers, and in-kind transfers are all equalizing, and spending on education and health is often pro-poor. Moreover, contrary to expectations, indirect taxes and subsidies are more frequently equalizing than unequalizing.

Download paper

The political economy of redistribution and (in)efficiency in Latin America and the Caribbean

Predominant views on the political economy of Latin America and the Caribbean tend to emphasize that elite domination helps to understand the high levels of inequality. The contemporary fiscal version of that assertion goes something like “the rich are powerful and they don't like taxes, hence we have little taxation and little redistribution.” That is a good approximation to the reality of some countries, but not of others. There are cases in the region where there are high levels of taxation and non-negligible redistributive efforts. But in some of those cases such redistribution comes hand in hand with macroeconomic imbalances, high inflation, low growth, as well as low-quality public policies. When redistributive efforts are short-sighted and attempted with inefficient public policies, fiscal imbalances lead to inflation and to frequent macroeconomic crises that reduce growth and thwart poverty reduction efforts. The argument of this paper is that there are various possible political configurations (including elite domination and populism among others) that lead to different economic and social outcomes (including the degree of redistribution and others). We postulate that each configuration of social outcomes emerges out of different political economy equilibria. Different countries in the region will be in different political economy equilibria, and hence will have different combinations of political economy syndromes and of socioeconomic outcomes. In this paper, we characterize the countries regarding the size of the public sector, how much fiscal redistribution there is, and how efficient this public action is. We summarize various strands of literature that attempt to explain some elements of that fiscal vector one at a time; and then attempt to provide a simple framework that might explain why different countries present different configurations of size, distributiveness, and efficiency.

Download paper

Racial and ethnic inequality in Latin America

This chapter examines socioeconomic inequality in Latin America through the lens of race and ethnicity. We primarily use national census data from the International Public Use Micro Data Sample (IPUMS). Since censuses use inconsistent measures of race and ethnicity, we also draw on two additional measures from the Latin American Public Opinion Project (LAPOP). Unlike censuses, LAPOP data offer a more consistent ethnoracial scheme across countries and a unique interviewer-rated skin color measure. Our study shows that black and indigenous populations and those with darker skin color experience educational, income, and occupational disadvantages, even after controlling for their social origins. However, inequality and hierarchical ordering of Afro-descendants, indigenous peoples, mestizos, whites, and others vary across countries. We include an extended examination of educational inequality in Brazil, the region’s largest country. The chapter concludes with an exploration of public policy approaches to address black and indigenous disadvantage across Latin America while also highlighting the case of Brazil, where targeted antiracism policy is most advanced.

Download paper

Health inequalities in Latin American and the Caribbean: child, adolescent, reproductive, metabolic syndrome and mental health 

Our health constitutes a fundamental aspect of our well-being. It is also a key factor in determining our contribution to market and non-market output. Health inequality refers to the unequal realization of health outcomes between different groups in the population. Systematic disparities in health outcomes and in access to health resources not only undermine basic principles of fairness and social justice but also contributes towards perpetuating poverty and disadvantage.

In this chapter, we start by presenting evidence on how the burden of disease in Latin America and the Caribbean (LAC) has changed during the last 30 years. Consistent with the fall in fertility and population aging, the region has shifted from a burden of disease dominated by maternal, neonatal, and communicable disease in the 1990s to one dominated by cardiovascular disease, cancers, diabetes, and increasingly by mental health disorders.

Download paper

Seventy-five years of measuring income inequality in Latin America

Drawing on a comprehensive compilation of quantile shares and inequality measures for 34 countries, including over 5,600 estimated Gini coefficients, we review the measurement of income inequality in Latin America and the Caribbean over the last seven decades. Although the evidence from the first quarter century – roughly until the 1970s – is too fragmentary and difficult to compare, clearer patterns emerge for the last fifty years. The central feature of these patterns is a broad inverted U curve, with inequality rising in most countries prior to the 1990s, and falling during the early 21st Century, at least until the mid-2010s, when trends appear to diverge across countries. This broad pattern is modified by country specificities, with considerable variation in timing and magnitude. Whereas this broad picture emerges for income inequality dynamics, there is much more uncertainty about the exact levels of inequality in the region. The uncertainty arises from the disparity in estimates for the same country/year combinations, depending on whether they come from household surveys exclusively; from some combination of surveys and administrative tax data; and on whether they attempt to scale income aggregates to achieve consistency with National Accounts estimates. Since no single method is fully convincing at present, we are left with (often wide) ranges, or bands, of inequality as our best summaries of inequality levels. Reassuringly, however, the dynamic patterns are generally robust across the bands.

Download paper

Labor market turnover and inequality in Latin America 

This paper describes the patterns of worker turnover in selected Latin American countries and their implications for wage inequality. It documents a higher positive annual wage growth rate for jobto-job changers compared to stayers, due to turnover capturing the immediate gains from search behavior in the short run. Younger workers benefit relatively more from the positive effects of jobto-job changes, as expected. We also show that transitions are relatively higher within the informal sector for most countries, and particularly so for workers without college education. Moreover, total job separations and transitions from formal into informal employment occur more often among low-skill and young individuals. Next, the paper analyzes wage growth by percentiles for all workers and job-to-job movers for each country over a more extended period. We find that jobto-job changes are inequality-reducing in the short run, consistent with search gains associated with turnover exhausting more rapidly for high-paid workers. In contrast, we find that human capital effects dominate the search effects in the long run, as human capital accumulates over time. Thus, long-run wage growth is lower for job changers than for stayers, so that, while in the short run the search effects tend to dominate those of human capital, in the long run the opposite occurs. As unskilled workers change jobs more frequently, this suggests that job changes are inequalityincreasing in the long run. A potential explanation for limited wage growth in Latin American economies may include high informality rates. Policies to reduce wage inequality should focus on improving the conditions for positive turnover towards better investment and, thus, higher-quality jobs.

Download paper

Inequality of opportunity and intergenerational persistence in Latin America

How strong is the transmission of socio-economic status across generations in Latin America? To answer this question, we first review the empirical literature on intergenerational mobility and inequality of opportunity for the region, summarizing results for both income and educational outcomes. We find that, whereas the income mobility literature is hampered by a paucity of representative datasets containing linked information on parents and children, the inequality of opportunity approach – which relies on other inherited and pre-determined circumstance variables – has suffered from arbitrariness in the choice of population partitions. Two new data-driven approaches – one aligned with the ex-ante and the other with the ex-post conception of inequality of opportunity – are introduced to address this shortcoming. They yield a set of new inequality of opportunity estimates for twenty-seven surveys covering nine Latin American countries over various years between 2000 and 2015. In most cases, more than half of the current generation’s inequality is inherited from the past – with a range between 44% and 63%. We argue that on balance, given the parsimony of the population partitions, these are still likely to be underestimates.

Download paper

Family Change in Latin America: Schooling and Labor Market Implications for Children and Women

This chapter provides an account of the major family transformations that occurred in recent decades across Latin American and Caribbean countries and examines the implications of such transformations for children’s school attendance and progress and women’s labor force participation. Latin American and Caribbean families and households have undergone substantial changes in recent years while keeping some of their distinctive features unchanged (Esteve et al., 2022; Esteve & Florez-Paredes, 2018a; Juárez & Gayet, 2014). This combination of stability and change has had profound transformations in the family status in which women raise their children and the family context in which children are raised. We refer to family context as the combination of women`s marital status and the type of households in which children reside. We combine references to the literature and own calculations based on Latin American and Caribbean population census samples, available at the Integrated Public-use Microdata Series International (IPUMS) (Minnesota Population Center, 2020). We use data from 25 countries based on the most recent census microdata and, in some instances, historical samples starting in the late 1950s (see Appendix 1).

Download paper

Inherited inequality: a general framework and an application to South Africa

Scholars have sought to quantify the extent of inequality which is inherited from past generations in many different ways, including a large body of work on intergenerational mobility and inequality of opportunity. This paper makes three contributions to that broad literature. First, we show that many of the most prominent approaches to measuring mobility or inequality of opportunity fit within a general framework which involves, as a first step, a calculation of the extent to which inherited circumstances can predict current incomes. The importance of prediction has led to recent applications of machine learning tools to solve the model selection challenge in the presence of competing upward and downward biases. Our second contribution is to apply transformation trees to the computation of inequality of opportunity. Because the algorithm is built on a likelihood maximization that involves splitting the sample into groups with the most salient differences between their conditional cumulative distributions, it is particularly well-suited to measuring ex-post inequality of opportunity, following Roemer (1998). Our third contribution is to apply the method to data from South Africa, arguably the world’s most unequal country, and find that almost threequarters of its current inequality is inherited from predetermined circumstances, with race playing the largest role, but parental background also making an important contribution.

Download paper

Assessing the effectiveness of social protection measures in mitigating COVID-19-related income shocks in the European Union

By means of counterfactual simulation methods, this paper quantifies the role of tax– benefit policies in mitigating the shock of the COVID-19 pandemic to household income in the European Union. The tax-benefit microsimulation model for the European Union EUROMOD is used to decompose changes in the income distribution into the effects of: (i) earnings losses due to COVID-19, (ii) automatic stabilizers, (iii) monetary compensation schemes introduced during the pandemic; and (iv) COVID-19-specific reforms to taxes and benefits implemented by European Union governments. The results show a great deal of heterogeneity between countries in terms of earnings losses and the effect of tax-benefit policies during the COVID-19 pandemic. In most countries, the largest contribution to cushioning the economic shock of the pandemic comes from monetary compensation schemes. Automatic stabilizers also play a role, mainly through the effects of social insurance contributions, taxes, and unemployment insurance benefits. Tax-benefit systems cushioned incomes to a large extent even among those most severely affected by the shock to earnings, with an important role for monetary compensation schemes, but also a larger stabilizing effect of unemployment insurance. Among automatic stabilizers, social assistance benefits played an important role in cushioning the income shock for the poorest quintiles among the most severely affected, but only in selected countries.

Download paper

Farm size and income distribution of Latin American agriculture: new perspectives on an old issue

Latin American and Caribbean countries have historically been known for their rates of land inequality, highest in the world. However, these countries also exhibit a high degree of heterogeneity in their patterns of land concentration and average farm sizes. These cross-country differences play a determining role in productivity of farms and the distribution of agricultural income. Constructing a new data-set matching agricultural census and household survey data, we provide suggestive evidence on the positive relationship between farm size and farm income and wages. We identify the prevalence of small farms and the resulting low agricultural incomes as an important mechanism contributing to high income inequality in agricultural regions. Low labor productivity in small farms appears as a key explanatory factor.

Download paper