Wage compression and the decline in inequality in Latin America

This blog posts explores some questions behind an article written by Levy Yeyati and Pienknagura – Wage compression and the decline in inequality in Latin America: Good or bad?“. We summarise the authors claims behind the decline in Latin American income inequality, and explain whether the decline is good or bad for Latin America.

The authors claim that there are 3 possible factors behind the decline in Latin American income inequality: increasing access to education, a decline in the demand for skill-intensive industries or a worsening of the educational system. Before we analyse these effects, it is important to note that the compression of the educational premium only accounts for half of the decline in inequality, so other factors must also be involved. [...]

Why has wage inequality risen?

Wage inequality has increased in many economies in recent decades. Discuss the three leading hypotheses regarding the causes of this increase. What does the empirical evidence tell us about the quantitative importance of each of these factors?

The US economy has almost double since the 1970s, and labour productivity has risen over this period. Yet real wages for the median worker hasn’t changed much since the 1970s, and below-median male wages have fallen; showing that the increasing size of the economy hasn’t been fairly distributed.

The rise in inequality between high skilled and low skilled workers is particularly pronounced, with Autor finding that households which are composed of university education individuals earned $30,298 more than non-skilled workers in 1979, but this rose to $58,249 by 2012, an increase of 92%. [...]

Everyday Economics – Why are consumer prices generally higher in urban areas than in rural areas?

In condensed urban areas there are many (potential) consumers and many firms operating to produce and sell to these consumers. The retail industry could be seen as operating between perfect competition and monopolistic competition, most retail establishments (including corner shops and the larger chains who sell branded goods; not including own brands) sell homogeneous goods and don’t usually have monopolies (however shop locations can be seen as effective local monopolies, as areas may be restricted as to the number of shops they can have). Therefore we would expect strong competition in this market and hence the driving down of prices for consumers. [...]