Exploring Roots of Inequality in Latin America and Peru

by Feridoon Koohi-Kamali (Volume editor)
Prompt X, 104 Pages


This book explores Latin American inequality broadly in terms of its impact on the region's development and specifically with two country studies from Peru on earnings inequality and child labor as a consequence of inequality for child labor. The first chapter provides substantial recent undated analysis of the critical thesis of deindustrialization for Latin America. The second chapter provides an approach to measuring labor market discrimination that departs from the current treatment of unobservable influences in the literature. The third chapter examines a much-neglected topic of child labor using a panel data set specifically on children.
The book is appropriate for courses on economic development and labor economics and for anyone interested in inequality, development and applied econometrics.

Table Of Contents

  • Cover
  • Title
  • Copyright
  • About the editor
  • About the book
  • This eBook can be cited
  • Table of Contents
  • List of Tables
  • List of Figures
  • Introduction
  • Chapter One: Labor and Deindustrialization in Latin America: A Look at Productivity, Globalization and Inequality (Alma A. Bezares Calderón)
  • Chapter Two: Measuring Discrimination in Peru’s Labor Market (Feridoon Koohi-Kamali)
  • Chapter Three: Household Shocks and Child Labor Incidence: Evidence from Peru (Roger White and Forrest Rouleau)
  • Contributors
  • Index

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This volume deals with inequality. Isolating the roots of inequality in a region as vast and diverse as Latin America requires an undertaking beyond the narrow focus of the present volume. Most studies on Latin America point to the growing diversity in the region’s labor markets; the Mexico/Central American region is characterized by informality, outmigration, and low productivity, while the Southern region has benefitted from higher average levels of schooling and less ethnic diversity, though overall, the region has very high levels of income inequality. Nonetheless, this volume demonstrates, both from a macroeconomic perspective of the entire region and via two country-level studies, that a few prominent causes of inequality are pervasive and empirically evident. The evidence presented here, while far from comprehensive, points to three specific causes of inequality that are suggestive of shared features of inequality across Latin America.

First there are sectoral differences in productivity that are closely related to declining shares of labor in agriculture and increases in the share of small firms operating in the informal services sector. Second, the growth of the informal services sector is the result of the migration from rural areas to the urban informal service sector because of a relative decline of manufacturing and deindustrialization. Third, compared to observations from East Asian economies, this trend has prevented the services sector from playing a leading role in Latin American economic growth due to the size of the high-skilled services sector in Latin America being relatively small; that is, the region does not have the average levels of ←1 | 2→education and the skilled labor to support a dynamic services sector that is capable of absorbing a high proportion of surplus labor. Hence, inequality as employed in this volume either results in sectoral differences in earnings or, at least, has a significant impact on labor market outcomes. The first chapter in this collection is a macroeconomic examination of aspects of Latin American inequality in terms of these factors. Using microdata, the second chapter, a country study, follows with an examination of the causes of earnings inequality. The third chapter, also a country study, focuses on child labor stemming from household shocks and inequality in terms of household wealth, education, etc. While the country studies employ wider sets of explanatory variables, both chapters empirically demonstrate the significant impacts of informal labor, rural migration, and education on labor market-related inequalities. While both country studies examine Peru and, thus, admittedly narrow the diversity of data sources, it is notable that Peru is also a country for which more extensive good quality data are available from international bodies. For that reason, it is often chosen for research on inequality and development change in Latin America. The longitudinal data from Peruvian households that is employed in the final chapter reflects this assessment.

Latin America has suffered a decline in labor productivity during recent decades. This has had significant consequences for the region’s economic growth and income inequality. A major issue that is prominent in the field is the cause of the region’s productivity decline. In many developing countries, productivity declines in recent decades have corresponded with a major shift to services provision. This is due to their manufacturing sectors having been prematurely exposed to international competition as a result of globalization. It is also in contrast to developed economies that outsourced industrial production abroad and focused on expanding their services sectors as a deliberate policy choice. The chapter by Bezares Calderón investigates this premature deindustrialization hypothesis for Latin America, explores the impact the shift has brought about in the sectoral composition of Latin American economies, estimates the distributional consequences of this shift, and offers evidence of increased income inequality.

The evidence from the existing research that Bezares Calderón examines singles out bulging informal service sectors as the main problem for Latin America’s economic development; over 1954–2011, the informal sector accounted for 53% of the jobs in Latin America. The three factors listed above are closely related to Latin America’s inequality. Rodrick (2013, 2015) sums up their relationship as follows. Deindustrialization limits the capacity of the manufacturing sector to absorb rural labor migration. One successful alternative, adopted by East Asian economies, is to promote the services sector as the engine of growth. However, for that to happen, the sector must be able to rely on highly skilled labor which requires high levels of education. The Latin America services sector does not have sufficient high-skilled labor to act as a leading engine of economic growth. As ←2 | 3→a result, rural migration has led to the rapid growth of a large informal sector of self-employed/small firms with low levels of productivity. Due to outmigration, the share of agricultural labor in the region has declined, manufacturing has absorbed less than 20% of these workers whereas the services sector has absorbed most, mainly in informal services. This combination of (a) rural migration, (b) an informal sector that is increasing in size, and (c) relatively low levels of skilled labor and education have resulted in significant sectoral inequality in earnings and incomes in Latin America. The author provides empirical evidence on the contribution of these factors to the Latin American pattern of inequality and development.

Bezares Calderón first spells out the econometric methods employed to test for evidence of joint movement between the time-series of productivity and industrial growth. The chapter then explores premature deindustrialization in terms of the growth rate of labor in manufacturing as a share of total employment of other sectors, a particularly important step for capturing the overall effect of the informal service sector on lagging productivity. Finally, the paper explores the scope of wage inequality by regressing the Gini Index of income inequality on employment for each of the main sectors defined by the population share employed. The author applies this empirical strategy to nine Latin American countries (Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru and Venezuela) employing, among others, data from the Penn World Table and from the World Income Inequality Database.

The co-integration test suggests there is no long-run joint movement between labor productivity and manufacturing growth. Moreover, separately estimating a two-equation productivity-growth model of deindustrialization for each country reveals that increases in imports reduced the size of the manufacturing sector in Latin America during the 1980s and 1990s. The paper then moves to identify the distributional effects of deindustrialization, presenting empirical evidence that while the shares of labor employed in the service sector and in agriculture correspond with higher levels of sectoral income inequality, with Gini measures of 0.34 and 0.11 respectively, and the Gini Index for the share of labor in manufacturing recording a reduction of 0.4 points. This outcome highlights how Latin America’s inequality is generated by differences in the sectoral shares of labor as outlined earlier. The author lists several caveats, including the difficulty of obtaining accurate data on the size of the large informal sector in Latin America.


X, 104
ISBN (Hardcover)
Publication date
2021 (October)
New York, Bern, Berlin, Bruxelles, Oxford, Wien, 2021. X, 104 pp., 25 b/w ill., 16 tables.

Biographical notes

Feridoon Koohi-Kamali (Volume editor)

Feridoon Koohi-Kamali studied economics at the University of London and received his doctorate in economics from Oxford University. He has taught at Oxford and a number of US universities including Columbia. Currently Associate Professor at The New School for Social Research, he has also been a consultant to the World Bank and a research associate at the Schuman Center for Advanced Studies, European University Institute. His research interests are in applied econometrics, public policy and development.


Title: Exploring Roots of Inequality in Latin America and Peru