The Microeconomics of Income Distribution Dynamicsin EastAsia and Latin America

THE MICROECONOMICS

OF INCOME DISTRIBUTION

DYNAMICS

IN EAST ASIA AND LATIN AMERICA

François Bourguignon

Francisco H. G. Ferreira

Nora Lustig

Editors

THE MICROECONOMICS OF

INCOME DISTRIBUTION

DYNAMICS IN EAST ASIA

AND LATIN AMERICA

THE MICROECONOMICS OF

INCOME DISTRIBUTION

DYNAMICS IN EAST ASIA

AND LATIN AMERICA

François Bourguignon

Francisco H. G. Ferreira

Nora Lustig

Editors

A copublication of the World Bank and Oxford University Press

© 2005 The International Bank for Reconstruction and Development / The World Bank

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First printing September 2004

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A copublication of the World Bank and Oxford University Press.

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ISBN 0-8213-5861-8

Cataloging-in-Publication Data has been applied for.

Contents

Preface xiii

Acknowledgments xv

Contributors xvii

Abbreviations and Acronyms xix

1 Introduction 1

François Bourguignon, Francisco H. G. Ferreira,

and Nora Lustig

2 Decomposing Changes in the Distribution of

Household Incomes: Methodological Aspects 17

François Bourguignon and Francisco H. G. Ferreira

3 Characterization of Inequality Changes through

Microeconometric Decompositions: The Case of

Greater Buenos Aires 47

Leonardo Gasparini, Mariana Marchionni, and

Walter Sosa Escudero

4 The Slippery Slope: Explaining the Increase in

Extreme Poverty in Urban Brazil, 1976–96 83

Francisco H. G. Ferreira and Ricardo Paes de Barros

5 The Reversal of Inequality Trends in Colombia,

1978–95: A Combination of Persistent and

Fluctuating Forces 125

Carlos Eduardo Vélez, José Leibovich, Adriana

Kugler, César Bouillón, and Jairo Núñez

6 The Evolution of Income Distribution during

Indonesia’s Fast Growth, 1980–96 175

Vivi Alatas and François Bourguignon

7 The Microeconomics of Changing Income

Distribution in Malaysia 219

Gary S. Fields and Sergei Soares

v

8 Can Education Explain Changes in Income

Inequality in Mexico? 275

Arianna Legovini, César Bouillón, and Nora Lustig

9 Distribution, Development, and Education in Taiwan,

China, 1979–94 313

François Bourguignon, Martin Fournier, and

Marc Gurgand

10 A Synthesis of the Results 357

François Bourguignon, Francisco H. G. Ferreira, and

Nora Lustig

Index 407

Figures

3.1 Gini Coefficient of Equivalent Household Income

Distribution in Greater Buenos Aires, 1985–98 49

3.2 Hourly Earnings–Education Profiles for Men

(Heads of Household and Other Family

Members), Age 40 55

3.3 Hourly Earnings–Education Profiles for

Women (Spouses), Age 40 56

3.4 Weekly Hours of Work by Educational Level for

Men (Heads of Household), Age 40 59

4.1 Macroeconomic Instability in Brazil: Inflation 84

4.2 Macroeconomic Instability in Brazil: Per Capita GDP 84

4.3 Truncated Pen Parades, 1976–96 87

4.4 Plotted Quadratic Returns to Education

(Wage Earners) 88

4.5 Plotted Quadratic Returns to Experience

(Wage Earners) 89

4.6 Combined Price Effects by Sector 106

4.7 Price Effects Separately and for Both Sectors

Combined 107

4.8 Occupational-Choice Effects 108

4.9 The Labor Market: Combining Price and

Occupational-Choice Effects 109

4.10 Demographic Effects 110

4.11 Shift in the Distribution of Education, 1976–96 111

4.12 Education Endowment and Demographic Effects 112

4.13 A Complete Decomposition 113

5.1 Average Household Size by Income Decile in

Urban Colombia, Selected Years 135

vi CONTENTS

5.2 Change in Income from Changes of Returns to

Education, Relative to Workers Who Have

Completed Secondary Education: Male and

Female Wage Earners in Urban Colombia,

Selected Periods 140

5.3 Change in Income from Changes of Returns to

Education, Relative to Workers Who Have

Completed Secondary Education: Male and

Female Self-Employed Workers in Urban

Colombia, Selected Periods 141

5.4 Probability of Being Employed or a Wage Earner

in Urban Colombia according to Various

Individual or Household Characteristics, Various

Groups of Household Members, Selected Years 146

5.5 Simulated Occupational-Choice and Participation

Changes in Percentage Points by Percentile of

Earnings for Urban Males and Females, 1978–88 154

5.6 Simulated Occupational-Choice and Participation

Changes in Percentage Points by Percentile of

Earnings for Urban Males and Females, 1988–95 156

5.7 Changes in Employment Rate by Income Percentile,

Females in Urban Colombia, Selected Periods 157

6.1 Summary Decomposition of Changes in the

Equivalized Household Distribution of Income 213

7.1 Changing Quantile Functions 221

7.2 Differences in Quantile Functions 222

7.3 Changing Lorenz Curves 224

7.4 Differences in Lorenz Curves 225

7.5 Household Quantile Curves: 1984 Baseline 253

7.6 Household Quantile Curves: 1989 Baseline 255

7.7 Quantile Curves: Simulated Values Minus 1984

Actual Values 257

7.8 Quantile Curves: Simulated Values Minus 1989

Actual Values 258

7.9 Lorenz Curves: Simulated Values Minus 1984

Actual Values 262

7.10 Lorenz Curves: Simulated Values Minus 1989

Actual Values 263

7.11 Household Quantile Curves: 1989 Baseline 265

7.12 Household Quantile Curves: 1997 Baseline 267

7.13 Quantile Curves: Simulated Values Minus 1989

Actual Values 269

7.14 Quantile Curves: Simulated Values Minus 1997

Actual Values 270

CONTENTS vii

8.1 Observed Change in Individual Earnings by Percentile

in Mexico, 1984–94 276

8.2 Change in Women’s Labor-Force Participation by

Education Level in Mexico, 1984–94 281

8.3 Returns to Education for Men by Location,

Education Level, and Type of Employment in

Mexico, 1984 and 1994 292

8.4 Effect of Labor Choices on Earnings by Percentile

in Mexico, 1984–94 298

8.5 Effect of Educational Gains on Earnings by

Percentile in Mexico, 1984–94 300

8.6 Effect of Changes in Returns to Education on

Earnings by Percentile in Mexico, 1984–94 301

8.7 Effect of Urban-Rural Disparities on Earnings

by Percentile in Mexico, 1984–94 303

9.1 Evolution of Income Inequality, 1979–94 318

9.2 Elasticity of Spouses’ Occupational Choice with

Respect to Head of Household’s Earnings 332

9.3 1979–94 Variation in Individual Earnings Caused

by the Price Effect, by Centiles of the 1979 Earnings

Distribution 336

9.4 Simulated Entries into and Exits from the Wage

Labor Force 337

9.5 Simulation of the 1994 Education Structure on

the 1979 Population 340

9.6 1979–94 Variation in Household Income Caused by

the Price Effect, by Centiles of the 1979 Distribution of

Equivalized Household Income Per Capita (EHIP) 344

9.7 Entries into and Exits from the Labor Force: Overall

Participation Effect 345

9.8 Effects of Imposing the 1994 Education Structure

on the 1979 Population 348

9.9 Effects of Imposing the 1994 Children Structure on the

1979 Population: Relative Variation by Centile of the

1979 Distribution of Equivalized Household Income 351

Tables

1.1 Selected Indicators of Long-Run Structural Evolution 3

3.1 Distributions of Income in Greater Buenos

Aires, Selected Years 49

3.2 Hourly Earnings by Educational Levels in Greater

Buenos Aires, Selected Years 50

3.3 Log Hourly Earnings Equation Applied to

Greater Buenos Aires, Selected Years 52

viii CONTENTS

3.4 Hourly Earnings by Gender in Greater Buenos Aires,

Selected Years 57

3.5 Weekly Hours of Work by Educational Levels in

Greater Buenos Aires, Selected Years 59

3.6 Hours of Work Equation for Greater Buenos Aires,

Selected Years 60

3.7 Labor Status by Role in the Household in Greater

Buenos Aires, Selected Years 62

3.8 Composition of Sample by Educational Level in

Greater Buenos Aires, Selected Years 63

3.9 Decompositions of the Change in the Gini Coefficient:

Earnings and Equivalent Household Labor Income in

Greater Buenos Aires, 1986–92 71

3.10 Decompositions of the Change in the Gini Coefficient:

Earnings and Equivalent Household Labor Income in

Greater Buenos Aires, 1992–98 72

3.11 Decompositions of the Change in the Gini Coefficient:

Earnings and Equivalent Household Labor Income in

Greater Buenos Aires, 1986–98 73

3.12 Decomposition of the Change in the Gini Coefficient:

Average Results Changing the Base Year in Greater

Buenos Aires, Selected Periods 74

4.1 General Economic Indicators for Brazil, Selected

Years 86

4.2 Basic Distributional Statistics for Different Degrees

of Household Economies of Scale 91

4.3 Stochastic Dominance Results 93

4.4 Educational and Labor-Force Participation Statistics,

by Gender and Race 94

4.5 Equation 4.2: Wage Earnings Regression for

Wage Employees 99

4.6 Equation 4.3: Total Earnings Regression for the

Self-Employed 101

4.7 Simulated Poverty and Inequality for 1976, Using

1996 Coefficients 104

4A.1 Real GDP and GDP Per Capita in Brazil, 1976–1996 115

4A.2 PNAD Sample Sizes and Missing or Zero Income

Proportions 116

4A.3 A Brazilian Spatial Price Index 117

4A.4 Brazilian Temporal Price Deflators, Selected Years 118

4A.5 Ratios of GDP Per Capita to PNAD Mean

Household Incomes, 1976–96 118

4B.1 Evolution of Mean Income and Inequality:

A Summary of the Literature 119

CONTENTS ix

5.1 Decomposition of Total Inequality between Rural

and Urban Areas, Selected Years 129

5.2 Labor-Market Indicators in Urban and Rural

Areas, Selected Years 132

5.3 Changes in Sociodemographic Characteristics

in Urban and Rural Areas, Selected Years 134

5.4 Earnings Equations of Wage and Self-Employed

Male and Female Urban Workers, Selected Years 138

5.5 Earnings Equations of Wage and Self-Employed

Male and Female Rural Workers, Selected Years 139

5.6 Marginal Effect of Selected Variables on Occupational

Choice among Wage Earners, Self-Employed Workers,

and Inactive Individuals for Urban Heads of Household,

Spouses, and Other Household Members, and All

Rural Workers, Selected Years 144

5.7 Decomposition Income Distribution Changes for

Households and Individual Workers in Urban and

Rural Colombia: Changes in the Gini Coefficient,

Selected Periods 150

5.8 Mean Income: Effect of Change in the Constant of

the Earnings Equation 153

5.9 Simulated Changes in Participation and Occupational

Choice in Urban Colombia, Selected Periods 153

6.1 Evolution of Mean Household Income, 1980–96 178

6.2 Evolution of the Socioeconomic Structure of the

Population, 1980–96 179

6.3 Evolution of the Personal Distribution of Income,

1980–96 180

6.4 Individual Wage Functions by Gender and Area,

1980–96 186

6.5 Household Profit Functions and Nonfarm

Activities, 1980–96 188

6.6 Simulated Evolution of Typical Incomes: Price Effect 192

6.7 Decomposition of Changes in the Distribution of

Individual Earnings 194

6.8 Decomposition of Changes in the Distribution of

Household Income Per Capita 198

6.9 Mean and Dispersion of Household Incomes

according to Some Characteristics of Heads of

Households 200

6.10 Occupational-Choice Behavior, 1980–96 202

6.11 Simulated Changes in Occupational Choices,

Whole Population 205

x CONTENTS

6.12 Simulated Changes in Occupational Choices, Rural

and Urban Population 206

7.1 Location of Actual Distribution of Per Capita

Household Income, 1984 and 1989, 1989 and 1997 223

7.2 Inequality of Actual Distribution of Per Capita

Household Income, Selected Periods 226

7.3 Occupational-Position Equations for Male Heads

of Household 231

7.4 Occupational-Position Equations for Female Heads

of Household 233

7.5 Occupational-Position Equations for Male Family

Members Who Are Not Heads of Household 235

7.6 Occupational-Position Equations for Female Family

Members Who Are Not Heads of Household 237

7.7 Earnings Functions for Male Wage Earners 240

7.8 Earnings Functions for Female Wage Earners 242

7.9 Earnings Functions for Male Self-Employed Workers 244

7.10 Earnings Functions for Female Self-Employed Workers 246

7.11 Distribution of Per Capita Household Income,

Substituting 1989 Values into 1984 Distribution 259

7.12 Distribution of Per Capita Household Income,

Substituting 1984 Values into 1989 Distribution 260

7.13 Rising Educational Attainments in Malaysia, 1984–97 261

7.14 Actual and Simulated Inequality for Disaggregated

Gender and Occupational-Position Groups 264

7.15 Distribution of Per Capita Household Income,

Substituting 1997 Values into 1989 Distribution 271

7.16 Distribution of Per Capita Household Income,

Substituting 1989 Values into 1997 Distribution 272

8.1 Inequality in Earnings and Household Income in

Mexico, 1984 and 1994 277

8.2 Characteristics of the Labor Force in Mexico, 1984

and 1994 279

8.3 Selected Results from Earnings Equations for Mexico 290

8.4 Decomposition of Changes in Inequality in Earnings

and Household Income in Mexico, 1984–94 295

8.5 Rural Effect in the Decomposition of Changes in

Inequality in Earnings and Household Income in

Mexico, 1984–94 297

9.1 Evolution of the Structure of the Population at

Working Age, 1979–94 316

9.2 Wage Functions for Men, Corrected for Selection

Bias, Selected Years 327

CONTENTS xi

9.3 Wage Functions for Women, Corrected for Selection

Bias, Selected Years 328

9.4 Decomposition of the Evolution of the Inequality of

Individual Earnings, 1979–80 and 1993–94 334

9.5 Decomposition of the Evolution of the Inequality

of Equivalized Household Incomes, 1979–80 and

1993–94 335

10.1 A Summary of the Decomposition Results 359

10.2 Interpreting the Decompositions: A Schematic

Summary 381

xii CONTENTS

Preface

The process of economic development is inherently about change.

Change in where people live, in what they produce and in how they

produce it, in how much education they get, in how long and in

how well they live, in how many children they have, and so on. So

much change, and the fact that at times it takes place at such sur￾prising speed, must affect the way incomes and wealth are distrib￾uted, as well as the overall size of the pie. While considerable efforts

have been devoted to the understanding of economic growth, the

economic analysis of the mechanisms through which growth and

development affect the distribution of welfare has been rudimentary

by comparison. Yet understanding development and the process of

poverty reduction requires understanding not only how total income

grows within a country but also how its distribution behaves over

time.

Our knowledge of the dynamics of income distribution is

presently limited, in part because of the informational inefficiency

of the scalar inequality measures generally used to summarize dis￾tributions. Single numbers can often hide as much as they show. But

recent improvements in the availability of household survey data for

developing countries, and in the capacity of computers to process

them, mean that we should be able to do a better job comprehend￾ing the nature of changes in the income distribution that accompany

the process of economic development. We hope that this book is a

step in that direction.

By looking at the evolution of the entire distribution of income

over reasonably long periods—10 to 20 years—and across a diverse

set of societies—four in Latin America and three in East Asia—we

have learned a great deal about a variety of development experi￾ences, and how similar building blocks can combine in unique ways,

to shape each specific historical case. But we have also learned about

the similarities in some of those building blocks: the complex effect

of educational expansion on income inequality, the remarkable role

of increases in women’s participation in the labor force, and the

importance of reductions in family size, to name a few.

xiii