# **1. Introduction**

Inequality continues to be a pervasive characteristic in Latin America. The region registered an average Gini level of 0.52 in 2010, ranking among the highest in the world. Nevertheless, after a generalized increase in the levels of inequality in the 1990s, the region experienced a sizeable downward trend that started in the early 2000s, in tandem with a period of accelerated economic growth and poverty reduction (Figure 1). As documented in Gasparini et al. (2011), this downward trend is statistically significant, generalized within subregions of Latin America or any other country-weighting scheme, and robust to the choice of inequality indicator. However, the average regional trend reflects substantial heterogeneity between countries, with the decline being greatest in El Salvador, Argentina, Brazil, Mexico and Ecuador (Figure 2).<sup>1</sup> The diversity of experiences across countries in the 2000s implies that there is no single satisfactory explanation for these trends, although the inequality literature on Latin America has highlighted a menu of possibilities. It points to improvements in earnings of the poor as well as better-targeted public transfer programs as the main drivers behind the reduction in inequality. For instance, López-Calva and Lustig (2010) found that the reduction in income inequality in Argentina, Brazil, Mexico and Peru can be attributed to two main factors: first, a shrinking wage gap between skilled and low-skilled workers contributed to an expansion in education in the last decades and second, there was an equalizing effect of government transfers, related to larger and better targeted conditional cash transfer programs in these countries. Jaramillo and Saavedra (2010) have similar findings for Peru. Other studies have pointed to demographic changes and greater female labor force participation (Gray Molina and Yañez, 2009 for Bolivia), realignments after the structural reforms of the 1990s (Ebherhard and Engel 2009 for Chile), favorable international markets with high commodity prices in the second half of the 2000s (Ferreira et al 2008 for Brazil), and a more active role in the labor market where governments took a more prounion stance and raised minimum wages and pensions (Gasparini and Lustig, 2011).

However, these results do not give us a magnitude for the relative importance of each of these effects. Was the observed reduction in inequality mainly accounted for by the introduction and expansion of public transfers, or were changes in employment and earnings mostly to blame? Given the ongoing demographic transitions of most countries in the region, how much of the observed distributional changes were driven by the region’s demographic dividend? Were the changes in labor income related to changes in the number of hours of work or in earnings per hour?

One way to answer these questions would be to use multi-year panel data that could track the life and labor histories of households over time and therefore uncover the sources of inequality

> 1 Inequality experienced a statistically significant decline in nine out of 17 countries in the region for the 2006-2009 period. See Gasparini et al (2011).

2