Accounting for Mexican Income Inequality during the 1990s

Abstract

The author implements several inequality decomposition methods to measure the extent to which total household income disparities can be attributable to sectoral asymmetries and differences in skill endowments. The results show that at least half of total household inequality in Mexico is attributable to incomes derived from entrepreneurial activities, an income source rarely scrutinized in the inequality literature. He shows that education (skills) endowments are unevenly distributed among the Mexican population, with positive shifts in the market returns to schooling associated with increases in inequality. Asymmetries in the allocation of education explain around 20 percent of overall household income disparities in Mexico during the 1990s. Moreover, the proportion of inequality attributable to education endowments increases during stable periods and reduces during the crisis. This pattern is explained by shifts in returns to schooling rather than changes in the distribution of skills. Applying the same techniques to decompose within-sector income differences, the author finds that skill endowments can account for as much as 25 percent of earnings disparities but as little as 5 percent of dispersion in other income sources.