In summary, while improvements in the labor markets in the Andean region and the Southern Cone (including Brazil) led the declines of inequality in these sub-regions, the inequality reduction seen in Central America and Mexico prior to 2010 was largely determined by factors external to the labor market – specifically, changes in the distribution of non-labor income sources and the impact of the Financial Crisis on labor incomes. In fact, labor earnings growth in Mexico significantly trailed that of other countries in the region before the crisis. Since the crisis, rising skill premia and higher income growth for the top deciles has led inequality reductions to become more modest or even to cease in some countries. On the other hand, there are signs that labor markets may continue reducing inequality in those countries in the region where the skill premium continues to fall.

# **Transfers**

The reach of transfers (both private and public) in Latin America increased considerably since the early 2000s, both in coverage and as a share of total household per capita income. In particular, public transfers have become increasingly equalizing in many countries in the region overt the recent years (Lopez-Calva and Lustig 2010, Lustig et al. 2013, and World Bank 2014) largely due to the proliferation of Conditional Cash Transfer (CCT) programs, which are mainly targeted towards the less well-off and are by design highly progressive.<sup>25</sup> Since CCT programs were launched in almost every country in Latin America in the early 2000s, there has been a significant expansion in the proportion of the population covered by these programs. However, even as coverage continued to increase, the rate of expansion of these CCT programs declined in many of the countries in the second part of the decade as some of these programs approached universal coverage of the eligible population. For instance, the population covered by CCT programs in Mexico and Brazil increased from about 10 percent in 2000 and 2003 to roughly 20 percent in 2002 and 2006, respectively, remaining fairly constant in both countries since then (Figure 10). This reduction in the rate of expansion of social programs, particularly CCTs, could have limited the equalizing impact of this income source, contributing to the stagnation and increment of income inequality observed in several countries.

However, there remain two other mechanisms that can be exploited to advance inequality reduction. The first is improvements in targeting: though CCTs are progressive, there is room for improvement in targeting benefits to the less well-off and reducing inequality. For instance, in Ecuador, 40 percent of the bottom quintile did not receive CCTs in 2012, while in Mexico this percentage was 60 percent. The second mechanism is to increase the generosity of these programs, considering first the caveats that extensions and benefit increases should be implemented so as not to distort labor supply, informality rates and threaten the fiscal sustainability of these programs.

> 25 CCT programs were introduced in 18 countries in Latin America and the Caribbean since 1997 (Cecchini and Madariga 2011, World Bank 2013).

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