The relationship between overall income inequality and wage differentials by education level, posed in the Tinbergen/Katz and Murphy literature, is further confirmed by the evidence in Figure 3.4, which presents scatter plots of the Gini coefficients with respect to the two wage differential variables. The fit is better for the aggregate skilled-unskilled wage differential, although the relationship between the Gini and the high school premium is still positive and strongly significant. Taken together, the evidence in Figures 3.3 and 3.4 suggests that the wage skill premiums are useful proxies for aggregate levels of inequality, and furthermore, that explaining the evolution of these differentials should prove useful for interpreting broader distributional changes in these economies.

# **4 Wage skill premium and correlated factors**

## **_4.1 Skill premiums and relative supply: Simple correlations_**

This section studies further some of the correlations that emerged from the descriptive analysis of the previous section. The methodology is based on Katz and Murphy’s (1992) study for the United States, which developed a series of time series regressions of the wage skill premium as a function of the relative supply of skilled labor and other factors. Here, and also following Manacorda _et al._ (2010), pooled data from all the countries in the sample are used. The advantage of pooling the data for the region is that it allows the inclusion of countries for which the limited number of years is not suitable for a country-specific regression. The results, thus, should be interpreted as reduced form estimates of averages for the whole region, with the caveat that the aggregate patterns described above do not necessarily correspond to all the 16 country experiences.<sup>9</sup> The wage skill premium regressions _a la_ Katz and Murphy (1992) attempt to establish the comparative relevance of supply and demand factors. In this framework, however, there is no unambiguous indicator of relative demand, and the literature for the United States has thus proxied these factors by adopting different specification of time trends. These are expected to capture shifts in the relative demand for skilled workers, and this approach has been adopted by most recent studies (Goldin and Katz, 2008; Acemoglu and Autor, 2010, among many others). The conjecture that time trends might capture adequately the shifts in relative demand seems to obey to the implicit assumption that the driving force behind these shifts is a relatively steady trend determined by cumulative factors, such as technological change. This assumption, however, does not seem to suit the nature of changes in Latin American economies. While technical change is probably a relevant force behind the demand for skilled labor in the region, a multitude of other factors might be expected to play a role, either directly mediating the forces of technological change (for instance, through relative prices of technology embedded in capital) or indirectly – for instance, external shocks, macroeconomic crises and the ensuing devaluations (which affect the relative price of capital with respect to labor), structural reforms (such as trade liberalization and privatizations, with direct effects on employment and demand for skills), and policy reversals. These types of events, more common in Latin American economies than in the advanced countries traditionally studied in Katz

> 9 Given the large differences in population and size of the economies, the results are presented as unweighted country averages.

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