The recent decline in income The recent decline in income inequality in Brazil and its inequality in Brazil and its consequences on povertyconsequences on poverty

Ricardo Paes de Barros (IPEA)

Bogota, October 2007

1. Magnitude1. Magnitude

In 2006, inequality continues to decline at the same rateIn 2006, inequality continues to decline at the same rate

Temporal evolution of the degree of inequality in Brazil over the previous decade: Gini coefficient (1996 - 2006)

0.55

0.56

0.57

0.58

0.59

0.60

0.61

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Gin

i c

oef

icie

nt

Average annual reduction rate : 1,2%

per year

Four reasons why this Four reasons why this decline must be decline must be

celebratedcelebrated

From the average to the lowest level

Evolution of inequality in family per capita income:Brazil (1976-2006), Gini coefficient

0.623

0.604

0.593

0.582

0.589

0.594

0.588

0.596

0.587

0.599

0.615

0.634

0.612

0.580

0.592 0.593

0.587

0.581

0.5690.566

0.623

0.602

0.5990.600

0.600

0.600

0.559

0.55

0.56

0.57

0.58

0.59

0.60

0.61

0.62

0.63

0.64

0.65

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Gin

i c

oef

fic

ien

t

Minimum

Average

Distribution of countries according to the rate of inequality (Gini coefficient) reduction

-10

-8

-6

-4

-2

0

2

4

6

8

10

0 10 20 30 40 50 60 70 80 90 100

Percentage of countries (%)

An

nu

al v

aria

tio

n i

n G

ini

coef

fici

en

t (%

)

Source: Data from Programa das Nações Unidas para o Desenvolvimento (PNUD) in World Income Inequality Database 2005 (WIID), http://www.wider.unu.edu/wiid/wiid-introduction.htmNote: We considered 74 countries according to the existence of information on the evolution of inequality.

Brazil (77, 1.2)

Few countries have reduced inequality faster than Brazil

Annual reducction in extreme poverty: Latin American countries

-1.1-1.1

-0.8

-0.6

-0.3

-0.2 -0.2

0.0

0.1 0.10.0

0.3

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

Mexico Brazil Nicaragua Peru Colombia Chile Guatemala Bolivia Honduras ElSalvador

Costa Rica Venezuela

An

nu

al

red

uc

tio

n (

in p

erc

en

tag

e p

oin

ts)

Source: Estimations produced with Panorama Social da América Latina 2005 - CEPAL and Pesquisa Nacional por Amostra de Domicílios (PNAD)- 2001 and 2005.

Poverty have declined three times faster than required by the first millennium development goal

Brazil did in four years what took 15 years for the Latin Brazil did in four years what took 15 years for the Latin American region to doAmerican region to do

1990 2002 2005 2006 1990-2005 2002-05 2002-06

Latin America 48.3 44.0 39.8 ...... 8.5 4.2 ......

Mexico 47.7 39.4 35.5 ...... 12.2 3.9 ......

Brazil 44.9 38.2 34.1 29.6 10.8 4.1 8.6

Source: Cepal, Panorama Social de 2006 and PNADs 1990, 2002, 2005 e 2006

Extreme poverty (%)Reduction in poverty (percentage points)

Country /region

Evolution of poverty in Brazil, Mexico and Latin America

1990 2002 2005 2006 1990-2005 2002-05 2002-06

Latin America 22.5 13.5 10.3 ...... 0.8 1.1 ......

Mexico 18.7 6.9 5.8 ...... 0.9 0.4 ......

Brazil 22.1 16.4 13.2 10.7 0.6 1.1 1.4

Source: Cepal, Panorama Social de 2006 and PNADs 1990, 2002, 2005 e 2006

Extreme poverty (%)Reduction in extreme poverty - annual

rate (percentage points/year)Country /region

Evolution of extreme poverty in Brazil, Mexico and Latin America

At least one half of the decline in poverty was due to the reduction in inequality

Contribution of growth and inequality reduction for the recent decline in poverty in Brazil

29

30

31

32

33

34

35

36

37

38

39

40

2002-06 2005-06

po

vert

y h

ead

cou

nt

(%)

2006

2002

2005

2006

Contribution of growth

Contribution of growth Contribution of

inequality reduction

Contribution of inequality

48%

52%

71%

29%

Annual growth in per capita income accumulated by the poorest percentiles - Brazil, 2001-2005

8.0

5.9

4.9

4.3

3.73.4

3.0

2.5

1.9

0.9

0

1

2

3

4

5

6

7

8

9

10

First Second Third Fourth Fifth Sixth Seventh Eighth Ninth Tenth

An

nu

al

gro

wth

(%

)

Average income

Source: Estimations produced with Pesquisa Nacional por Amostra de Domicilios (Pnad) - 2001 and 2005.

Distribution of countries according to annual per capita GDP growth rate during 1990 and 2003

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

Percentage of countries (%)

An

nu

al

gro

wth

in

pe

r c

ap

ita

GD

P (

19

90

-20

03

)

Source: Estimations produced with Human Development Report (2005) UNDP.Note: We are considering 170 countries according to the existence of information.

Annual growth of Brazilian top 10%

Annual growth of Brazilian bottom 10%

Haiti

China

Ivory Cost

Over the past five years the income of the poor have been growing like the per capita GDP in China

From 2001 to 2006 the per capita income of the bottom 10% From 2001 to 2006 the per capita income of the bottom 10% increased at a Chinese rate (9% per year). It was more than increased at a Chinese rate (9% per year). It was more than

three times the national average (2,5%)three times the national average (2,5%)Average annual growth rate of family per capita income by

tenth of the distribution: 2001-06

0

1

2

3

4

5

6

7

8

9

10

First Second Third Fourth Fifth Sixth Seventh Eighth Ninth Tenth

Av

era

ge

an

nu

al

gro

wth

ra

te (

%)

Bottom 10%

Top 10%

National average

Annual growth rate of family per capita income by tenth of the distribution: 2003-06

0

2

4

6

8

10

12

14

16

18

First Second Third Fourth Fifth Sixth Seventh Eighth Ninth Tenth

An

nu

al

gro

wth

ra

te (

%)

2003-04

2004-05

2005-06

Absolute income gain by percentile: Brazil, 2001-06

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

0 10 20 30 40 50 60 70 80 90 100

percentile

inc

om

e g

ain

(R

$/m

on

th)

The need for continuityThe need for continuity

Distribution of countries according to per capita income, average income of top 20% and average income of bottom 20%

0

5000

10000

15000

20000

25000

0 10 20 30 40 50 60 70 80 90 100

Percentage of countries

An

nu

al

pe

r c

ap

ita

in

co

me

in

US

$ P

PP

Average income of bottom 20%

Per capita income

Average income of top 20%

Brazil (64, 7790)

Source Human Development Report (2005) UNDP.Note: We considered 124 countries

Brazil (43, 934)

Tunisia(64, 2148)

Brazil (70, 24616)

Cumulative distribution of countries according to inequality level - Gini coefficient

0

10

20

30

40

50

60

70

80

90

100

20.0 25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0 70.0

Gini coefficient

Cu

mu

lati

ve

dis

trib

uti

on

(%

)

Brazil 2001(59.3, 94.3)

Source: Estimations produced with the Human Development Report (2005) UNDP.Note: We considered 124 countries

Brazil 2005(56.6, 89.6)

Immediate Immediate DeterminantsDeterminants

Counter-factual simulations

Degree of inequality

(Gini coefficient)

Contribution for the

reduction in inequality (%)

Determinants

Original situation in 2001 59.3

If the 2006 distributions of per adult family income and percentage of adults in the family were equal to the corresponding distributions for 2001

59.6 -7Association between the percentage of adults in the family and family income per adult

If the 2006 distribution of per adult family income were equal to the corresponding distribution for 2001 59.3 9 Distribution of the percentage of adults in the family

If the 2006 distributions of per adult family labor income and per adult family non-labor income were equal to the corresponding distributions for 2001

59.0 9Association between the per adult labor and non-labor income

If the 2006 distribution of per adult family labor income were equal to the corresponding distribution for 2001 57.2 52 Distribution of non-labor income per adult

If the 2006 distributions of per worker family labor income and proportion of adults working were equal to the corresponding distributions for 2001

57.4 -5Association between the percentage of adults working and the family labor income per worker

If the 2006 distribution of per worker family labor income were equal to the corresponding distribution for 2001 57.3 3 Distribution of the percentage of adults working

Original situation in 2006 55.9 39 Distribution of family labor income per worker

Immediate determinants of the recent decline in income inequality in Brazil: 2001-06

(%)

Degree of inequality (Gini coefficient) 27 14 18

Poverty Headcount - P0 28 8 5

Poverty gap - P1 19 11 18

Severity of poverty - P2 15 13 27

Extreme poverty headcount - P0 17 11 22

Extreme poverty gap - P1 10 15 37

Severity of the extreme poverty - P2 8 20 49

Contribution of government transfers for the recent decline in inequality and poverty in Brazil: 2001 - 2006

Characteristics of the income distribution Social security

pensions Social assistance Bolsa Família

Total PensionsSocial

assistancePrograma Bolsa

Família

Gini coefficient 51 57 27 14 18

Poverty rate (P0) 60 44 30 8 5

Poverty gap (P1) 52 50 19 11 18

Poverty severity (P2) 46 57 15 13 27

Extreme poverty rate (P0) 54 50 17 11 22

Extreme poverty gap (P1) 40 64 10 15 37

Extreme poverty severity (P2) 30 74 8 20 49

Characteristics of the income distribution

Contribution of changes in labor income, public pensions, social assistance and Programa Bolsa Família for the decline in inequality, poverty and extreme

poverty

Labor income

government transfers

2001-06

Improvements in the labor marketImprovements in the labor market and the increase in and the increase in government transfers equally explain the decline in poverty and government transfers equally explain the decline in poverty and

inequality in Brazilinequality in Brazil

(%)

Total Social securitySocial

assistanceProgram Bolsa

Família

Degree of inequality (Gini coefficient) 51 57 27 14 18

Poverty headcount - P0 60 44 30 8 5

Poverty gap - P1 52 50 19 11 18

Poverty severity - P2 46 57 15 13 27

Contribution of labor income, and government transfers for the recent decline in inequality and poverty in Brazil: 2001-06

Labor income

Public transfers

Characteristics of the distribution of income

The Life Cycle Bias of The Life Cycle Bias of Government Transfers Government Transfers

in Brazilin Brazil

Poverty age profile without government transfers: Brazil, 2004

0

5

10

15

20

25

30

35

40

45

50

55

60

65

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80

Age

He

ad

co

un

t ra

tio

(%

)

Source: Estimations produced with Pesquisa Nacional por Amostra de Domicílios (Pnad) - 2004.

Average

Poverty age profile: Brazil 2004

0

5

10

15

20

25

30

35

40

45

50

55

60

65

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80

Age

He

ad

co

un

t ra

tio

(%

)

Transfers included

Source: Estimations produced with Pesquisa Nacional por Amostra de Domicílios (Pnad) - 2004.

Average

Poverty age profile including and excluding government transfers: Brazil 2004

0

5

10

15

20

25

30

35

40

45

50

55

60

65

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80

Age

He

ad

co

un

t ra

tio

(%

)

Transfers included

Transfers excluded

Source: Estimations produced with Pesquisa Nacional por Amostra de Domicílios (Pnad) - 2004.

Average

We have been giving priority to the elderly, while reducing We have been giving priority to the elderly, while reducing povertypoverty

Average annual rate of reduction in poverty headcount by age: Brazil, 2001-06

0

5

10

15

20

25

30

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80

Age

aver

age

ann

ual

rat

e o

f re

du

ctio

n (

%)

Poverty

Extreme poverty

As a consequence, the level of poverty among children is almost As a consequence, the level of poverty among children is almost tenfold higher than among the elderlytenfold higher than among the elderly

Poverty by age, Brazil 2006

0

5

10

15

20

25

30

35

40

45

50

55

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80

age

po

vert

y h

ead

cou

nt

(%)

Children

Elderly

National average

As a consequence, the level of poverty among children is almost As a consequence, the level of poverty among children is almost tenfold higher than among the elderlytenfold higher than among the elderly

Extreme poverty by age, Brazil 2006

0

2

4

6

8

10

12

14

16

18

20

22

24

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80age (years)

extr

eme

po

vert

y h

ead

cou

nt

(%)

Children

Elderly

National mean

Educational ProgressEducational Progress

Evolution of the impact of schooling on labor income: Brazil, 1996-06

12.7

13.8

14.4 14.5

13.813.5

12.9 12.9

12.5

12.2 12.2

12.0

12.5

13.0

13.5

14.0

14.5

15.0

1995 1996 1997 1998 1999 2001 2002 2003 2004 2005 2006

Imp

ac

t o

f o

ne

ex

tra

ye

ar

of

sc

ho

oli

ng

(%

)

Evolution of the average impact of basic primary education (first to fourth grade) on labor income: Brazil, 1995-2006

10

11

12

13

14

15

16

17

18

19

20

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

aver

age

im

pa

ct o

f o

ne

extr

a ye

ar o

f ed

uca

tio

n (

%)

Evolution of the average impact of the second phase of primary education (fifth to eight grade) on labor income:

Brazil, 1995-2006

5

6

7

8

9

10

11

12

13

14

15

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

av

era

ge

imp

ac

t o

f o

ne

ex

tra

ye

ar

of

ed

uc

ati

on

(%

)

Evolution of the average impact of secondary education on labor income: Brazil, 1995-2006

10

11

12

13

14

15

16

17

18

19

20

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

aver

age

im

pa

ct o

f o

ne

extr

a ye

ar o

f ed

uca

tio

n (

%)

Evolution of the average impact of college education on labor income: Brazil, 1995-2006

15

16

17

18

19

20

21

22

23

24

25

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

av

era

ge

imp

ac

t o

f o

ne

ex

tra

ye

ar

of

ed

uc

ati

on

(%

)

Evolution of the degree of inequality of education in the labor force: Brazil, 1996-2006

4.44

4.44

4.47

4.49

4.50

4.49

4.504.50

4.49

4.47

4.46

4.40

4.42

4.44

4.46

4.48

4.50

4.52

1995 1996 1997 1998 1999 2001 2002 2003 2004 2005 2006

Sc

ho

oli

ng

sta

nd

ard

de

via

tio

n

(%)

Characteristic Price and quantity Price Quantity

Labor income

Experience 7 -1 7

Education 39 19 17

Per capita family income

Experience 2 -1 3

Education 17 11 4

Contribution of education and labor market experience for the reduction in inequality: Brazil, 2001-06

Labor Market Labor Market Imperfections: Imperfections:

Discrimination and Discrimination and SegmentationSegmentation

Evolution of the gap in labor income by race and gender: Brazil, 1995-2006

54.8

62.063.2

61.1 61.1

58.759.1

57.056.1

58.1

66.3

11.311.0

12.312.3

11.3

12.912.6

11.711.7

12.412.2

50

55

60

65

70

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Gen

de

r g

ap

in

la

bo

r in

co

me

(%

)

10

12

14

16

18

Ra

ce

ga

p i

n la

bo

r in

com

e (

%)

Gender gap

Race gap

Evolution of the wage gap between large metropolitan areas and small and median size municipalities

6.1

18.4

10.110.7

12.9

11.09.4 9.3

6.2 6.44.5

5.6

19.317.1

20.7

23.0

25.726.0

28.0

32.0

29.530.2

0

5

10

15

20

25

30

35

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Years

Wa

ge

ga

p (

%)

Wage gap between large metropolitanareas and median size municipalities

Wage gap between large metropolitanareas and small municipalities

Source: Estimations based on Pesquisa Nacional por Amostra de Domicílios (PNAD) 1995 to 2006.

Evolution of the gap in labor income between urban and rural areas: Brazil, 1995-2006

10.6

8.4

7.16.6

9.7

12.0

10.310.9

10.2

13.9

11.8

0

2

4

6

8

10

12

14

16

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Gap

in l

ab

or

inc

om

e (

%)

Evolution of the gap in labor income among economic sectors: Brazil, 1995-2006

7.1

6.5

8.9

6.4

6.0

6.6

8.28.3

8.8

9.39.1

4

5

6

7

8

9

10

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Av

era

ge

ga

p i

n l

ab

or

inc

om

e (

%)

2001-05 2001-06

Inequality generated by labor market 18 13

Discrimination 4 3

Segmentation 14 11

Geographical 11 12

State 2 5

Urban-rural 3 1

Size of municipality 7 6

Formal / informal -7 -6

Economic sectors 10 5

Contribution of reductions in labor market discrimination and segmentations for reductions in income inequality

Contribution (%)Determinants

Let us limit our celebration, Let us limit our celebration, after all the decline in after all the decline in

inequality has not been inequality has not been accompanied by a major accompanied by a major

concomitant increase in labor concomitant increase in labor productivity productivity

Growth in per capita family income and labor income by percentile: 2001-06

-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

50

55

60

0 10 20 30 40 50 60 70 80 90 100

Percentile

Gro

wth

(%

)

Per capita family income

Workers labor income

The exit path for the very poor remains limited. The exit path for the very poor remains limited. Brazilian social policy does not seem very effective in giving Brazilian social policy does not seem very effective in giving

short-run opportunities for the very poorshort-run opportunities for the very poor

Labor income average annual growth rate by tenth of the distribution: 2001-06

-1

0

1

2

3

4

5

6

First Second Third Fourth Fifth Sixth Seventh Eighth Ninth Tenth

An

nu

al

gro

wth

ra

te (

%)

Bottom 10%

Recent growth in labor productivity in Brazil : 2001-06

-25

-20

-15

-10

-5

0

5

10

15

20

25

0 10 20 30 40 50 60 70 80 90 100

Percentile

Gro

wth

ra

te i

n l

ab

or

pro

du

ctiv

ity

Recent growth in labor productivity in Brazil : 2001-06

-25

-20

-15

-10

-5

0

5

10

15

20

25

0 10 20 30 40 50 60 70 80 90 100

Percentile

Gro

wth

ra

te i

n l

ab

or

pro

du

ctiv

ity

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Per

cen

tag

e o

f th

e p

op

ula

tio

n b

y p

erce

nti

le

Growth in labor productivity

College educationLess than four years

of education

Recent growth in labor productivity in Brazil : 2001-06

-25

-20

-15

-10

-5

0

5

10

15

20

25

0 10 20 30 40 50 60 70 80 90 100

Percentile

Gro

wth

ra

te i

n l

ab

or

pro

du

ctiv

ity

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Per

cen

tag

e o

f th

e p

op

ula

tio

n b

y p

erce

nti

le

Median size municipalities

Small municipalitiesMetropolitan areas

Growth in labor productivity

Recent growth in labor productivity in Brazil : 2001-06

-25

-20

-15

-10

-5

0

5

10

15

20

25

0 10 20 30 40 50 60 70 80 90 100

Percentile

Gro

wth

ra

te i

n l

ab

or

pro

du

ctiv

ity

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Per

cen

tag

e o

f th

e p

op

ula

tio

n b

y p

erce

nti

le

Manufacturing

Aggriculture

Transports and comunications

Growth in labor productivity

Recent growth in labor productivity in Brazil : 2001-06

-25

-20

-15

-10

-5

0

5

10

15

20

25

0 10 20 30 40 50 60 70 80 90 100

Percentile

Gro

wth

ra

te i

n l

ab

or

pro

du

ctiv

ity

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Per

cen

tag

e o

f th

e p

op

ula

tio

n b

y p

erce

nti

le

Formal employed

Informal employed

Self-employed

Growth in labor productivity

Recent growth in labor productivity in Brazil : 2001-06

-25

-20

-15

-10

-5

0

5

10

15

20

25

0 10 20 30 40 50 60 70 80 90 100

Percentile

Gro

wth

ra

te i

n l

ab

or

pro

du

ctiv

ity

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Per

cen

tag

e o

f th

e p

op

ula

tio

n b

y p

erce

nti

le

South

Northeast

Southeast

Growth in labor productivity

The very limited The very limited effectiveness of the effectiveness of the

Minimum Wage Policy Minimum Wage Policy for reducing poverty for reducing poverty

and inequalityand inequality

The impact of increasing the minimum wage and benefits from Bolsa Familia on the cumulative income of the poorest percentiles

0

5

10

15

20

25

30

35

0 10 20 30 40 50 60 70 80 90 100

Percentage of population

Gro

wth

in

av

era

ge

in

co

me

(%

)

Source: Estimations produced with Pesquisa Nacional por Amostra de Domicílios (Pnad) 2005.

Bolsa Familia

Minimum wage

Per capita income

The impact of increasing the minimum wage and the benefits from Bolsa Familia on average income of the percentiles accumulated by the center of

the distribution

0.0

0.5

1.0

1.5

2.0

2.5

0 10 20 30 40 50 60 70 80 90 100

Percentage of population

Gro

wth

in

av

era

ge

in

co

me

(%

)

Source: Estimations produced with Pesquisa Nacional por Amostra de Domicílios (Pnad) 2005.

Bolsa Familia

Per capita income

Minimum wage

49