How Mexico's Financial Crisis Affected Income Distribution

After Mexico's financial crisis in 1994, the distribution of income, and labor earnings improved. Did inequality increase during the recession, as one would expect, since the rich have more ways to protect their assets than the poor do? After all, labor is poor people's only asset (the labor-hoarding hypothesis). In principle, one could argue that the richest deciles experienced severe capital losses, because of the crisis in 1994-96, and were hurt proportionately more than the poor were. But the facts don't support this hypothesis. As a share of total income, both monetary income (other than wages, and salaries) and financial income, increased during that period, especially in urban areas. Financial income is a growing source of inequality in Mexico. Mexico's economy had a strong performance in 1997. The aggregate growth rate was about 7 percent, real investment grew 24 percent, and exports 17 percent, industrial production increased 9.7 percent, and growth in civil construction (which makes intensive use of less skilled labor) was close to 11 percent. Given those figures, it is not surprising that the distribution of income, and labor earnings improved, but the magnitude, and quickness of the recovery prompted a close inspection of the mechanisms responsible for it. The authors analyze the decline in income inequality after the crisis, examine income sources that affect the level of inequality, and investigate the forces that drive inequality in Mexico. They find that in 1997 the crisis had hurt the income share of the top decile of the population, mainly by reducing its share of labor earnings. Especially affected were highly skilled workers in financial services, and non-tradables. Results from 1998 suggest that the labor earnings of those workers recovered, and in fact increased. Indeed, labor earnings are a growing source of income inequality.

Bibliographic Details

Main Authors:	Lopez-Acevedo, Gladys, Salinas, Angel
Language:	en_US
Published:	World Bank, Washington, DC 2000-07
Subjects:	aggregate growth, agriculture, allocation effect, average rate, domestic demand, dynamic decomposition, earnings inequality, economic growth, economic policy, economic sector, economic sectors, elasticity, endogenous variable, explanatory power, exports, financial crisis, fishing, forestry, GDP, GDP per capita, Gini coefficient, Gini Index, gross domestic product, gross domestic product growth, growth rate, household income, household members, income, income distribution, income effect, income gross, income groups, income inequality, income share, income source, income sources, increased rate, inequality, inequality changes, inequality index, labor force, labor market, low-income countries, macroeconomic policies, monetary transfers, negative growth, net effect, per capita income, policy research, poor people, population share, real wage, reducing inequality, relative income, relative labor, skill premium, skilled labor, skilled workers, social services, technological change, unemployment, unemployment rate, urban areas, wages, financial crises, earnings capacity, inequity, poverty incidence, capital market volatility, monetary indicators, financial intermediation, aggregate variability, real variables, export performance, economic recovery, financial services,
Online Access:	http://hdl.handle.net/10986/21401
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