where reductions in inequality continued, the levels of growth achieved by the less well-off (typically, the bottom 10 percent) in the later period were lower than those observed during the first period for half of these countries (Uruguay, Ecuador, Dominican Republic, Argentina, Colombia and Brazil). Furthermore, the growth rates of the better off (the top 10 percent) were negative or close to zero for most countries.<sup>18</sup> Thus the inequality reduction observed between 2010 and 2012 in these countries can be explained, in large part, by a lack of growth of income among top earners - rather than to higher income growth for the less well-off as had been observed between 2003 and 2010. On the other hand, for those countries where inequality increased (or in the case of Panama, did not change) between 2010 and 12, growth incidence curves reveal an increase in growth rates relative to 2003-2010 for some parts of the income distribution, particularly at the top. This finding poses an interesting question on the sustainability of past sources of growth for the poorest, both labor income and transfers. It also casts doubt on whether the recent fall in income inequality observed in some countries in the region represents the type of inequality decline countries would like to maintain in the years to come - one supported by negative or zero growth rates of the incomes of the better-off rather than higher growth rates for the low-income.

The decline of inequality observed between 2003 and 2010 was relatively homogeneous across the region, while the recent stagnation of income inequality is the result of a rather heterogeneous phenomenon. Some countries maintained inequality reduction in line with earlier trends, while others experienced a slowdown (Brazil), stagnation (Panama) or reversal (Peru, Costa Rica, Mexico and Honduras). Moreover, two of the countries in which the trend during 2010-12 deviated significantly with respect to their “long-run” trajectory – Brazil and Mexico - are also a significant share of the region’s population and thus have a large influence on the regional (and sub-regional) patterns of income inequality. These two countries combined with Peru, Costa Rica, Panama and Honduras, countries with increasing or stagnant inequality, represent almost 70 percent of the total population of Latin America. The next section will discuss in detail the underlying changes in the household income sources driving the region’s income inequality trajectory.

**4. Income sources driving inequality stagnation**

Underlying the trends in inequality reported above are significant adjustments in the distribution of income sources largely driven by changing returns to labor and expansions of direct transfer programs throughout the region.<sup>19</sup> As labor income accounts for 73 percent of all household income in the region, changes in the region’s labor markets have driven much of the inequality trends seen in Latin America. Simultaneously, along with increased receipt of remittances, the region experienced a significant expansion of public transfer programs in the 2000s and increased access to noncontributory pensions for the less well-off. While pensions, primarily received by higher income

> 18 In the case of Uruguay, the country with the highest pace of inequality reduction in the period 2010-12, the growth of the top five percent was -6.8%. Other countries like Paraguay, Ecuador, Dominican Republic showed rates of growth for the top five about -4.2%, -2% an -2.2% respectively

> 19 Labor income data in the SEDLAC source surveys is typically reported as take-home net pay. As such, it excludes payroll taxes and other deductions in the formal wage-employment sector.

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