Explaining Earnings and Income Inequality in Chile

Abstract: The focal point of all papers in this thesis is income inequality in Chile. In some of them household income is analyzed, in others monthly earnings or the wage rate are used. In the first and fourth paper a long-run analysis is done, while in the second and third I concentrate my attention only on the 1990s. Despite the different periods covered, the variables analyzed, and methods used, in general the thesis attempts to bring to light the factors that help to explain the levels and changes of income inequality in Chile, a country that has a marked position among the most unequal in the region and has gone through great political and economic changes in the last decades. Moreover, Chile posses some surveys of fairly good quality that permit long-run or country-wide analysis of the distribution of earnings and income. Therefore, Chile is not only an interesting country to study, but it is also encouraging. The first paper summarizes the development of household income and earnings inequality of several groups of the Chilean labor market during the period 1958-2004. Furthermore, it surveys the explanations given in existing studies to the levels of and trends in income inequality in the last decades. With the exception of the early 1970s, income inequality deteriorated from 1957-63 to the 1987-90 period, before declining in 1991-98. The rate of return to university education, as well as the dispersion of hourly earnings of males and white-collar workers, has generally followed the overall pattern of inequality. Education was found to be a key factor behind the dispersion of incomes and earnings in Chile, explaining 13-40% of the inequality, depending on the survey, definition of income, year, method, and sample used. Openness and trade has been suggested to be important to understand the deterioration of Chile's distribution of wages through the increased demand for skilled workers that followed the external sector liberalization after the mid 1980s. Evidence that increased female labor-force participation and higher rates of unemployment have an inequality increasing effect is provided by various studies. The second paper focuses on several important but relatively unexplored issues in the body of relevant literature. Using a Bootstrap technique, and analyzing self-employed workers separately from employees, this paper presents several interesting results. Wage and salary and household income inequality deteriorated significantly at the end of the decade while the dispersion of self-employment incomes deteriorated in the 2000-03 period with respect to 1992 and 1996-98. Accounting for 20%-40%, the between-group component of education was an important factor to explain the level of inequality. But as income disparities between educational groups grew larger during the 1990s, education played a dominant role to explain even the change of wage and salary and self-employment income inequality. This was corroborated analyzing the Gini coefficient of household income by source, which reveals that its underlying components changed in size although the Gini coefficient remained at 0.54 all the three years analyzed. The earnings of employees and the self-employed with university education accounted for over 26% of the Gini coefficient of household income in 1990. By 2003, this share had gone up to 40%. The contribution of earnings of primary educated employees and self-employed workers declined from 7% to less than 2% over the same period. The third paper studies the distributional effects of an occupational change that occurred in Chile's labor market from 1992 to 2000. During this period the employment structure shifted towards informal employment (from 9% in 1992 to 15% in 2000), but also towards professional occupations (19% in 1992 to 26% in 2000). Both within-group and between-group composition-effects increased inequality, while within-group and between-group change in variance reduced it. However, using the inequality-decomposition of Fields and Yoo (2000) to analyze the inequality within-occupations it is found that even education and hours-worked had an increasing effect in overall inequality, while all the other variables in the earnings equation, and especially the residuals, had an inequality-decreasing effect. The fourth paper analyzes in detail the inequality of hourly earnings of male workers in Santiago. Analyzing the years 1974, 1987, 1992, 2000, and 2003 I concentrate my attention on the extreme values in inequality of the last decades. Using an Oaxaca-Blinder type decomposition, but implementing quintile regressions, I am able to decompose changes in the male wage inequality into a price effect, a composition effect, and a residual. The first important finding is that inequality in the upper part of the distribution seems to be more important than the dispersion in the lower part to total inequality. Second, the large deterioration of male wage inequality between 1974 and 1987 was the result of the combined price effect and composition effect. For other inequality changes the price effect was dominant. Among the variables included in the quintile wage equations, such as age, education, occupation, and sector, education was the one with the largest composition effect.