decline in income inequality throughout the region due to their expansion in coverage and better targeting.<sup>5</sup> Nevertheless, one of these studies warned about the sustainability of the “redistributive momentum” observed across the region over the past decade. In their conclusion, Lustig, Lopez-Calva and OrtizJuarez (2013), argue that the decline in inequality observed in Latin America may be hard to sustain due to factors such as the distribution of the quality of education and less favorable terms of trade. Moreover, Campos, Esquivel and Lustig (2012) find evidence of labor incomes in Mexico “being unequalizing in 2010” and Lustig, Lopez-Calva and Ortiz-Juarez (2013) pose the question on whether this fact was a result of “the knock-off effects of the Global Financial Crisis of 2007-09 or a new trend.” A more recent report by the World Bank found evidence of inequality stagnation in Latin America since 2010, with the Gini coefficient remaining fairly constant at 0.52 since then (World Bank, 2014a).

This study continues where the analysis of Lustig, Lopez-Calva and Ortiz-Juarez (2013) ends, and analyzes regional trends of income inequality between 2010 and 2012. It contributes to the existing literature in a number of ways. First, this study is the first analyzing the sources of the recent stagnation of income inequality in the region. Second, it takes advantage of comprehensive harmonized household survey microdata (the SEDLAC database produced by CEDLAS and the World Bank) which allow cross-country comparability. These microdata cover 17 countries in Latin America and account for about 90% of the total population in the region. It is also important to highlight that, unlike other studies on this topic relying on SEDLAC data, this study uses the microdata instead of country-level indicators generated from the SEDLAC project. This allows detailed analysis on inequality trends across the region as well as between and within countries. Identifying the factors behind the slowdown of inequality reduction in the region has important implications for public policy.

This study presents evidence of inequality stagnation in Latin America, confirming the result reported by the World Bank (2014a), and verifying that this stagnation is robust to different measures of income inequality (Gini, Theil, mean log deviation, and Atkinson). It also identifies the geographical source of this stagnation in inequality, establishing that regional inequality reflects mainly withincountry trends, rather than income divergence between countries. Moreover, looking across countries, the trends reflect rising inequality levels in Mexico and some countries in Central America (Panama, Costa Rica, and Honduras), as well as a recent slowdown in inequality reduction in the Andean region during 2011-2012 (Ecuador, Colombia, and Bolivia) and in Brazil.

The main contribution of this paper, however, lies in the identification of the underlying changes in the household income sources driving the region’s income inequality gains prior to 2010 and its stagnation after that year. While improvements in the labor markets of the Andean sub-region and Southern Cone (including Brazil) led the declines of inequality in these sub-regions before 2010, the

> 5 An in depth study of inequality in four Latin American countries finds that public transfers became increasingly equalizing after 2000, particularly from targeted spending through programs like Bolsa Familia in Brazil and Progresa/Oportunidades in Mexico (Lopez Calva and Lustig, 2010).

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