inequality increases.<sup>20</sup> Since labor income accounts for the majority of household income, the effect of other income sources on total income inequality is limited by its smaller share of total income.<sup>21</sup> The second finding is that the reduction or reverse of the equalizing effect of labor income since 2010 happened not only in those countries where inequality increased, but also in countries like Brazil and Chile where inequality reductions have continued. In these countries, the equalizing effect of labor income fell by half relative to the first period. This suggests a weakened role of labor income as an equalizing income source in half of the countries of Latin America, including most of the region’s population.<sup>22</sup> Despite their small share of total income, changes in transfers (including both public and private transfers such as remittances) had an obvious equalizing effect during the period of regional inequality reduction (2003-10).<sup>23</sup> However, during the period of regional stagnation (2010-12), their effect notably weakened in Mexico and Central America. The role of transfers in inequality reduction was relatively stable throughout 2003-2012 for those countries that experienced a steady fall in inequality (Uruguay and Ecuador and Argentina). Moreover, for some countries, like Colombia, Chile and Paraguay, transfers increased their contribution to inequality reduction. However, this pattern did not hold for the Dominican Republic and El Salvador: even as inequality fell in those countries, the role of transfers during 2010-12 was smaller or reversed from the earlier period. This effect seems to be related to a broad regional pattern seen in Mexico and Central American countries: the impact of changes in transfers became less equalizing or unequalizing for all types of countries in this group - those where the inequality increased (Honduras and Mexico), decreased (El Salvador and Dominican Republic), or stagnated (Panama). The exception was Costa Rica, for which changes in transfers were consistently associated with increases in inequality.

There is also evidence of pro-poor pension growth during this period, turning pension income from neutral or regressive to one of the drivers of the reduction of inequality. While pensions remain largely regressive, changes in pension income had a minimal impact on inequality levels during 2003-10; in fact, for 11 of 15 countries, pensions had either no effect or only a small unequalizing effect on total income. This trend reversed during 2010-12, when the number of countries for which changes in pensions did not result in lower inequality fell to just 5 (Colombia, the Dominican Republic, Mexico, Paraguay and Peru). Instead, for most countries, changes in pensions have led to declines in inequality. In the case of Brazil, for example, changes in pensions explain half of the inequality reduction during the 2010-12 period while in Chile they explain a third.

“Other non-labor income” sources include the value of housing and returns on capital as well as sources specific to each country’s surveys. Notably, these include the Bolsa Familia, Brazil’s largest CCT program, which, due to data limitations, cannot be easily extracted from the surveys. As returns to capital and implicit rent are not well measured in household surveys and are not fully harmonized

> 20 This holds for all countries and periods, except for Peru 2010-12.

> 21 However, significant impacts on total income inequality from other income sources can be obtained when these sources experienced relatively high growth rates over focalized points in the income distribution.

> 22 See Table A3 in the annex.

> 23 Note that, due to data limitations, Bolsa Familia, Brazil’s largest CCT program, is not included in “transfers.”

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