predominance of long-lasting changes in the HDI is remarkably common across all the economies in our sample. Not surprisingly, we find that this heterogeneity is in large part due to the strong relationship between the cyclical components of the social indicators and the cyclical component of income (i.e., the business cycle). These stylized facts strongly suggest that more structural indicators of social conditions such as the HDI would clearly provide a better picture of permanent gains of social well-being because, by construction, they would not depend on the vagaries of the business cycle and other cyclical changes. In other words, relying on inherently cyclically-driven social indicators, especially over relatively short periods of time, may yield a misleading reading of the social situation because part of the improvement during economic booms could be (at least partially) reversed when the inevitable recession comes along.<sup>8</sup> In fact, for a world sample of developing and industrial countries, we conclude that fluctuations in cyclical income explain 47.4 and 23.3 percent of the variance in unemployment rate and monetary poverty, respectively. The equivalent figure for the HDI is only 1.7 percent.

We then dig deeper into the importance of cyclical versus permanent income components by extending the seminal contribution of Datt and Ravallion (1992). In particular, we show that for LAC as a whole, 41.2 percent of the fall in monetary poverty during the Golden Decade was due to cyclical income factors, 23.8 percent was due to permanent income growth, and 35 percent was due to redistribution. Put differently, almost two thirds of the fall in monetary poverty associated with income gains is explained by cyclical income. One should thus be careful about how to assess permanent social gains, particularly in economies where output is highly volatile which, as we show, increases the cyclical effects on social indicators.

The paper proceeds as follows. Section 2 resorts to a univariate time series approach to compute the relative weight of the cyclical and trend components in the variance of each social indicator. Section 3 links the cyclical component of social indicators to the business cycle and shows that, everything else equal, cyclical income volatility plays a crucial role in driving the cyclicality of social indicators. Using household survey data for a set of LAC countries, Section 4 decomposes the fall in monetary poverty during the Golden Decade into permanent income growth, cyclical income, and redistribution. Section 5 concludes.

# **2. How Cyclical are Social Indicators?**

When examining the evolution of social indicators over recent decades, we should always keep in mind that any change in the underlying indicator can be decomposed into a cyclical component, typically driven by short-term factors, and a trend component that responds to structural considerations. Taking this distinction into account is critical for policymakers since policies and programs implemented to deal with cyclical fluctuations of social indicators are intrinsically different

> 8 An alternative, naturally, would be to construct cyclically-adjusted monetary poverty measures.  However, as discussed in Riera-Crichton _et al_ . (2016) in the context of fiscal policy, cyclically-adjusted measures have also serious shortcomings.

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