Two Essays on Income Inequality in Chile

Abstract: This first paper summarizes the explanations given to the level and change of income and earnings inequality in Chile in the last decades. Education has been found to be a key factor behind earnings inequality in Chile, explaining 9-40%, depending on the survey, definition of income, year, method, and sample used. Openness increased the demand for high-educated workers, and thereby might have affected the rate of return to education and inequality. Higher female labour-force participation, unemployment, and higher minimum wage are found to have only small effects on aggregate measures of income inequality but are found to have larger impacts on quintiles income share. Simulated tax reforms imply small changes in inequality-indicators, although redistribution and a flat tax-rate reduced the Gini coefficient from 0.488 to 0.438. The second paper analyzes earnings inequality in Chile using a decomposition of its change between 1992 and 2000. Both within-group and between-group composition-effects increased inequality, while within-group and between-group change in variance reduced it. 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 the residuals decreased inequality between 1992 and 2000.