Microeconomics of Income Distribution in East Asia and Latin America

Poverty reduction is a complex and dynamic process that results from the combined effects of four phenomena: changes in personal earnings arising from productivity gains and/or shifts from a job or sector of activity to another; changes in occupational status; changes in the demographic composition of families; and the replacement of older less-educated cohorts by younger, better-educated, and more productive cohorts.

Understanding how this complex process works and how it depends on the structure and pace of economic growth is essential for designing policies aimed at accelerating poverty reduction. Yet relatively little is known to date on this subject. Only recently has it become possible to make more or less systematic comparisons of aggregate poverty and inequality measures over time in a reasonably large number of developing countries. Economic phenomena governing the dynamics of poverty are of a micro-economic nature. Understanding them requires more than following the evolution of some summary poverty or inequality measures.

This chapter book is designed to fill that gap. Based on the available household surveys for a number of countries in both Asia and Latin America, the project utilizes microsimulation exercises to obtain quantitative estimates for the contributions to observed changes in household income of four sets of effects. These effects are: the price effect, caused by changes in the hourly compensation of employed workers or in the prices of the output of the self-employed, and the shifts in the sector or occupational activity; the income effect, caused by changes in tax and public spending policies; the demographic effect, caused by changes in behavior related to marriage, fertility, etc.; and the labor effect, caused by the individual decisions in terms of participating in the labor force, occupational choice, work "effort," etc.

Country case studies:

East Asia:

Latin America:

Last updated: 04/26/07