Seminarios

Coautores: Marcela Meléndez y Nicolás Urdaneta.

Abstract

Though inequality decreased in Latin America in the first two decades of the 21st century, it continues to be much higher than in Europe and the US. The income distribution in Latin America is also much more skewed: it is dominated by a much thicker and long left tail. And, not unlike those comparison economies, it also exhibits a long right tail. We illustrate the link between this somewhat bipolar character of inequality in the region and the similarly bipolar character of the distribution of productive units, where income is generated. The firm size distribution in Latin America is dominated by a plethora of tiny businesses, which absorb several times more employment than in the US and Europe and exhibit much lower relative productivity, while the upper tail of the firm size distribution exhibits higher market concentration that in those countries. 20% of the distance between Latin America and the US in the 50/10 personal income gap is explained by higher concentration in the categories with poorer relative productivity and wages: self-employment and employment in micro establishments. In the right tail of the income distribution, the larger 90/50 personal income gap in the subcontinent vs. the US is fully explained by larger relative incomes of business owners, especially business owners of larger firms, which display high relative markups and low labor shares. We show that market concentration in the region is large and indeed tied to larger capital rents (more precisely smaller labor shares), but not suboptimal given the extreme dispersion of productivity and prevalence of low productivity businesses. In the end, the central message is that high inequality in the region is also deeply rooted in the productivity problem. Finally, tying these conclusions to the evolution of inequality in the region, we find that factor reallocation across firm size categories with different income gaps has not contributed to inequality reduction but rather has blocked it. The mild decrease in inequality of personal income in the 2000s is dominated by a decrease in the 90/50 gap, mostly explained by a reduction of the income gap of non-micro business owners. A general catchup of incomes in the middle and lower part of the distribution seems to be the leading force in the recent trend in inequality between 2005 and 2019.

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