Inequality Stagnation in Latin America in the Aftermath of the Global Financial Crisis

Abstract

Over the past decade (2003-12), Latin America has experienced strong income growth and a notable reduction in income inequality, with the region's Gini coefficient falling from 55.6 to 51.8. Previous studies have warned about the sustainability of such a decline, and this paper presents evidence of stagnation in the pace of reduction of income inequality in Latin America since 2010. This phenomenon of stagnation is robust to different measures of inequality and is largely attributable to the impact of the Global Financial Crisis on Mexico and Central America, where inequality rose after 2010 as labor income recovered. Moreover, this paper finds evidence that much of the continuation of inequality reduction after the crisis at the country level has been due to negative or zero income growth for households in the top of the income distribution, and lower growth of the incomes of the poorest households. The crisis also highlighted weaknesses in the region's labor markets and the heavy reliance on public transfers to redistribute, underscoring the vulnerability of the region's recent social gains to global economic conditions.