Inequality and Poverty in Mexico: 1982-2010

Nora LustigSamuel Z. Stone Professor of Latin

American EconomicsTulane University

New Orleans, November 17, 2011

Inequality and Poverty Trends

• Two distinct phases:– 1982-1994 - Debt crisis and structural reforms:

inequality and poverty rose.– 1994-2006 - Post-NAFTA, economic crisis, recovery

and slow-growth: inequality and poverty declined.• More recently

– 2006-2010 - Great Recession: poverty rose and the decline in inequality lost steam.

• Sources: Lustig (2010), Campos, Esquivel and Lustig (2011, in progress)

Inequality (Gini) and Poverty (Headcount): 1984-1992

Panel A: 1984-1992

12

13

14

15

16

17

18

44

46

48

50

52

54

1984 1989 1992

Pobreza Extrem a (%)

Gini

Gini (Lustig y Szekely, 1997b) Pobreza extrema (Lustig y Szekely, 1997a) Gini CoefficientHeadcount Ratio

Rise in Poverty: Debt Crisis or Policy?

• Debt crisis would have caused an increase in poverty no matter what. However:

• Evidence of “overadjustment:” fiscal policy more contractionary than required to restore macroeconomic balance.

• Brunt of adjustment was placed on Mexico; no “haircuts” for creditors until ten years later.

• Fiscal cuts did not protect spending on the poor.• Elimination of general subsidies on staples and dismantling of

agricultural support schemes were not replaced by compensatory programs

=> Policies exacerbated the impact of debt crisis on poverty.

Slight Decline in Poverty in the Early 1990s: Did Policy Help?

• Poverty declined slightly nationally, but rose in rural areas and the South and Southeast.

• Coincided with rural uprisings and revolts; Zapatista uprising the most salient.

• PRONASOL—Salinas’ administration flagship anti-poverty program– focused on building infrastructure in rural communities.

• But no safety nets to deal with sharp fall in international coffee prices and dismantling of price support and subsidies in agriculture.

• => Policy did not help.

Inequality (Gini) and Poverty (Headcount): 1984-1992

Panel A: 1984-1992

12

13

14

15

16

17

18

44

46

48

50

52

54

1984 1989 1992

Pobreza Extrem a (%)

Gini

Gini (Lustig y Szekely, 1997b) Pobreza extrema (Lustig y Szekely, 1997a) Gini CoefficientHeadcount Ratio

Rise in Inequality: 1980s and Early 1990s Market Forces or Policy?

• Unequalizing effect of increase in skilled/unskilled wage gap: – Between 1984 and 1995, real wages for skilled workers

rose by around 8 percent and unskilled wages decreased by around 22 percent.

• Increase in wage gap (skill premium) was linked to:– Trade liberalization and other factors which shifted labor

demand towards workers with higher skills.– Reduction in real minimum wages and weaker unions.

=> Policy contributed to increase in earnings--and hence overall--inequality.

Relative Returns and Relative Supply

Decomposition of Differences in the Distribution of Earnings: 1989-1994

-.5-.2

.1.4

.71

Log

wag

e ef

fect

s

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100Quantile

Total differential Effects of CharacteristicsEffects of Returns

Returns (Wage gap)

Real Minimum Wage Index (Dec. 2010=100)

100

120

140

160

180

200

Rea

l Min

imum

Wag

e (D

ecem

ber 2

010=

100)

1988m1 1992m1 1996m1 2000m1 2004m1 2008m1 2010m12Year

Real Minimum Wage 2010=100

Wage distribution with respect to median: 1989 and 2010

.1.1

2.1

4.1

6.1

8.2

Uni

oniz

atio

n R

ate

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010Year

ENIGH ENOE

Unionization Rate

Decline in Inequality: 1994/96-2006Market Forces or Policy?

• Labor earnings, government transfers and remittances have been equalizing.

• Labor earnings have been equalizing because skilled/unskilled wage gap decline.

• Decline in wage gap linked to rise in relative supply of skilled workers.

• Real minimum wages remained constant; irrelevant to earnings inequality trends.

• With launching of CCT Progresa/Oportunidades, government transfers became more progressive.

Gini Coefficient: 1984-2006

Decomposition of Differences in the Distribution of Earnings: 1994-2006

Returns (Wages gap)

Relative Returns and Relative Supply

Wage distribution with respect to median: 1989 and 2010

Decline in Inequality Loses Steam: 2006-2010

• New Trend or Great Recession? Too early to tell.

• But, could be the result of slowing down of educational upgrading; barriers to tertiary education access due to low quality of basic education and opportunity cost of not working

-.5-.2

.1.4

.71

Log

wag

e ef

fect

s

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100Quantile

Total differential Effects of CharacteristicsEffects of Returns

Decomposition of Differences in the Distribution of Earnings: 2006 - 2010

Returns (Wage Gap)

Government Transfers: Change in Gini (Mexico 2008; in %)

21

% change wrt market income Effectiveness Indicator

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

ArgentinaBrazilMexicoPeruBolivia

Government Transfers: Change in Headcount Ratio (Mexico 2008; in %)

22

% change wrt net market income Effectiveness Indicator % change wrt net market income Effectiveness Indicator

-80.0

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

ArgentinaMexicoBrazilBoliviaPeru

Headcount Index ($ 2.5 PPP)

Headcount Index ($4 PPP)

23

Share of benefits going to... Percent of poor who are beneficiariesPercent ofPoor <2.5 Poor <4 Non-poor Poor <2.5 Poor <4 Total PopulationCEQ Social SpendingGDP

ARGENTINANon Contributory Pensions39% 48% 52% 39% 32% 20% 15% 2%Asignación Universal Por Hijo (simulated)38% 60% 40% 48% 47% 21% 3% 0%BOLIVIABono Juancito Pinto 38% 61% 39% 20% 19% 14% 2% 0%Bono Sol 40% 53% 47% 8% 6% 5% 6% 1%BRAZILBolsa Família 49% 72% 28% 55% 47% 18% 2% 0%Benefício de Prestação Continuada (BPC)a37% 57% 43% 5% 5% 2% 3% 1%MEXICO

41% 66% 34% 62% 50% 20% 4% 0%29% 43% 57% 14% 10% 4% 1% 0%

Seguro Popular 29% 52% 48% 41% 38% 19% 4% 0%PERUJuntos 56% 81% 19% 36% 27% 9% 3% 0%Food Transfers 32% 54% 46% 39% 36% 20% 5% 0%

FLAGSHIP PROGRAMS

OportunidadesProcampo

Conclusions• Rise in poverty and inequality in 1980s and

early 1990s: – Debt crisis– Overadjustment: excessive fiscal contraction. – Labor market policy: falling minimum wage and

unionization rate. – Structural reforms-cum-wrong type of/missing safety

nets: trade liberalization, dismantling of general subsidies with flagship anti-poverty program not focused on income support (PRONASOL).

Conclusions

• Decline in poverty and, particularly, inequality in post-NAFTA 1994-2006:– Mild growth.– Educational expansion resulted in a reduction of

skilled/unskilled wage gap.– Government transfers became more progressive and

helped increase incomes of the poorest: Conditional Cash Transfer Program PROGRESA/OPORTUNIDADES.

– However, there is still a large share of extreme poor not covered by existing safety net.

Conclusions

• Decline in inequality loses steam: 2006-2010; poverty increases in 2008 and 2010.– Educational upgrading might be constrained by

both demand and supply factors => skilled/unskilled wage gap will not continue to decline and it may start rising again.

– Safety nets not designed to cope with shocks: rising food prices and falling employment and incomes due to macroeconomic shock (Great Recession).

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