Fighting poverty means solving the inequality problemNovember 2nd, 2012 | by Nick Galasso
Last week, the World Bank released a new report assessing declining income inequality over the 2000s in Argentina, Brazil, and Mexico. Each country experienced significant reductions in inequality over the last decade. This finding is not new, but the authors helpfully tease out some nuance behind the trend.
Their findings suggest two factors drove the contraction in inequality. First, the skills premium (the wage distribution based on education) fell. In other words, the difference in pay between skilled versus unskilled workers declined. In Argentina, declining labor income inequality was driven by a boom in trade that caused a drop in demand for skilled workers. These conditions were bolstered by strong unions and a rise in the minimum wage. Focused government spending on higher education increased the supply of skilled labor in Mexico. Both factors—reduced demand and increased supply for skilled workers—were in play in Brazil.
The second factor is more progressive government transfers, as expanding coverage of cash transfer and social security programs played a significant equalizing force in the distribution of non-labor income in each country.
All three cases put in relief that solving inequality is fundamentally a problem of politics, not economics. In each, government spending on education, conditional cash transfers, and other social expenditures helped drive down inequality.
The authors provide some astounding figures highlighting why tackling inequality is crucial.
In Mexico, nearly 60 percent of the poverty decline since 1996 is attributed to reducing inequality. Argentina’s inequality drop accounts for 40 and 50 percent of extreme and moderate poverty declines, respectively. For Brazil, 50 to 60 percent of extreme poverty decline is attributable to reducing inequality.
These figures remind us that the fight against inequality and the fight against poverty are one in the same.