# **Introduction**

Inequality is a distinctive feature of Latin America due to its high level and persistence.<sup>1</sup> After rising in the 1990s, however, income inequality in the 2000s unambiguously declined in the majority of countries<sup>2</sup> . From an (unweighted) average of 0.530 in the late 1990s, the Gini coefficient for household per capita income<sup>3</sup> fell to 0.497 in 2010.<sup>4</sup> Of the 17 countries for which there is (reasonably) comparable data, 13 experienced a decline (while the Gini increased in other parts of the world) (Figure 1).<sup>5</sup> Existing analysis suggests that the decline in inequality is robust to the selection of the time interval, income variable, inequality measure, and data source.<sup>6</sup> The order of magnitude of the decline is non-trivial and in all but one case statistically significant.<sup>7</sup> As shown in Figure 2, in the eleven countries for which the comparison is possible, the decline in the 2000s was higher than the increase in inequality in the 1990s (in the cases where there was such an increase). Furthermore, a Datt-Ravallion decomposition of the changes in poverty during the 2000s reveals that the reduction in inequality —on average—accounted for 50 percent of the observed decline in poverty; the lowest contribution was found in Peru (10.8 percent) and the highest in Paraguay (89.9 percent).<sup>8</sup> (Figure 3) Inequality in Latin America is linked to state-capture on the part of predatory elites, capital market imperfections, inequality of opportunities (in particular, in terms of access to high-quality education), labor market segmentation, and discrimination against women and non-whites.<sup>9</sup> Hence, the observed fall in inequality is good news both in terms of fairness and efficiency.

What factors are behind the decline in inequality in Latin America in the 2000s? Here we examine the role played by demand and supply of labor by skill, institutional factors such as minimum wages and unionization rates, and government transfers in accounting for changes in inequality in the three largest (measured by GDP) countries in Latin America: Argentina (urban)<sup>10</sup> , Brazil and Mexico. The three countries analyzed in this paper can be considered a representative sample (not in the statistical sense, but in terms of their characteristics) of middleincome countries in Latin America which have experienced a reduction in income inequality over the past decade. It includes a country that experienced relatively high growth rates (Argentina) and two countries where growth was modest (Brazil and Mexico) during the period of analysis; one of the most unequal countries in Latin America (Brazil); a traditionally low-inequality country, which witnessed the largest increase in inequality in the region over the past three decades (Argentina); and, finally, countries with center-left governments (Argentina and Brazil) and one country governed by a non-leftist regime (Mexico). It should also be noted that Mexico and Brazil are the countries in which the inequality decline started the earliest (1996 and 1998, respectively).

This paper uses evidence from our own research as well as that of others. In particular, we draw on results from the research project “Markets, the State and the Dynamics of Inequality in Latin America” coordinated by Luis F. Lopez-Calva and Nora Lustig, and sponsored by the United Nations Development Program (UNDP).<sup>11</sup> More specifically, we draw on the studies for Argentina by Gasparini and Cruces (2010), Brazil by Barros et al. (2010) and Mexico by Esquivel et al. (2010) (all three published in Lopez-Calva and Lustig (2010)). We also draw on results from Azevedo et al. (2011), Battiston et al. (2011), Bergolo et al. (2011), Cruces et al. (2011) and Gasparini et al. (2011) for Latin America as well as Campos et al. (2012) for Mexico.<sup>12</sup> Our analysis is thus based on work that combines qualitative (country case studies) and quantitative