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paper5doc - WAGE POLARIZATION AND INEQUALITY IN URUGUAY, 1986-97

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paper5doc - WAGE POLARIZATION AND INEQUALITY IN URUGUAY, 1986-97

     WAGE POLARIZATION AND INEQUALITY IN URUGUAY, 1986-97

     Carlos Gradín and Máximo Rossi (*)

    Published in El Trimestre Economico, Vol. 67, No. 267, July-September 2000, Mexico

    Abstract

    The aim of this paper is to study the evolution of wage polarization in Uruguay during the last twelve years. The results show that wage distribution in Uruguay has gradually become more unequal and, in particular, more bipolarized. At the root of this process there lie the

    increasing premiums for qualification and experience, as well as the increasing wage differential among the different industries.

    JEL: D300, D630, I320

    (*) Respectively Departamento de Economía Aplicada, Universidade de Vigo (Spain) (cgradín@uvigo.es) and Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República (Uruguay) (mito@decon.edu.uy). The authors thank the

    financial support given by Sida/SAREC of Sweden and the Committee for Scientific Research (CSIC) of the University of the Republic, Uruguay. We also thank the favourable comments made at the seminar of Network of Social Economics Centers in Lima, Peru, at the II Latin American Seminar of Social Economics, as well as the suggestions made by an anonymous speaker.

     1

1- Introduction

     The aim of this paper is to study the evolution of wage polarization in Uruguay between 1986 and 1997. The analysis of polarization and, in particular, of the changes in the size of the middle-class are of particular interest if we consider that this country has always been characterized by stable indicators of inequality, despite all its structural changes (Bucheli and Rossi, 1994; Vigorito, 1998).

    Recent studies on the evolution of inequality for certain items of households’ total income reveal some important changes that had usually remained hidden in the global analysis. Bucheli and Rossi (1994) describe significant changes in pension distribution

    while Miles and Rossi (1999) show the growing trend of inequality in wage income distribution since the early nineties. These changes are closely related to changes in the labor market. As regards the supply, there has been an increase in women?s participation rate and in the educational levels of the new generations; and as regards the demand, there seems to be an increasing preference for educated labor force. All these changes have taken place within the framework of a more open economy since the advent of MERCOSUR, and of some crucial changes in the mechanisms of wage negotiation, which have become more decentralized as of 1990.

    This paper is divided into six sections. In the next section we shall be discussing inequality and polarization measures. In section three we have included the sources of data for Uruguay; in section four we outline the results; in section five we analyze the causes of the growing polarization process and, in section six, we present the most relevant conclusions.

2- Inequality and polarization.

     2.1.- Measuring inequality.

     Wage inequality is given by the degree of wage dispersion with respect to a reference value, the mean wage, which describes the situation of perfect equality as being the same wage for every worker. To measure it we shall be employing three indices that are 1consistent with Lorenz criterion: the Gini coefficient, the Theil coefficient and the

    coefficient of variation. Therefore, if we transfer a monetary unit from any individual to another one with a lower wage, the three indices will register a fall in inequality levels. The

    main difference among them is that if we consider two transfers at the same time, one that

    reduces inequality and another one that increases it, the final result will depend on the weight that each index gives to both of them. Such weight will depend, in turn, on the position of each of the affected individuals within distribution, as each index has different sensitivities to transfers that occur at different points in income distribution.

    Let us consider a set of wages xi, I=1,…,n that have F as the distribution function.

     1 That means they satisfy the principles of anonymity, scale independence and population, as well as the Pigou-Dalton transfer principle.

     2

The mean is indicated by . The Gini coefficent G is defined as twice the area between the

    Lorenz curve and the perfect equality line, and can be expressed as:

    nn1xx. (1) G(F)=??ij22nij!!11

     This index is more sensitive to the transfers that occur in the center of the distribution, while the coefficient of variation and Theil coefficient are more sensitive to the upper and lower tails respectively. For ln, the natural log, Theil is defined by:

    n?xx1ii T(F)= (2) ??1n???n1i?

And the coefficient of variation by:

    n112 CV(F)= (3) ;;x.?in1i

     2 We should bear in mind that the Gini coefficient is bounded between 0 and 1, while 3the other two indices take values equal to or larger than 0 but do not have an upper bound.

     2.2- Measuring polarization.

     The notion of inequality refers to the existence of only one pole and the measurement of dispersion with respect to that pole. However, if we wish to study to what extent different poles are beginning to form in the distribution, then the notion of polarization is more appropriate. Thus, the situation of extreme polarization is reached when distribution is divided into two large groups internally homogeneous, situated at the extremes of the distribution, each of them holding half the population.

    Esteban and Ray (1994) describe polarization as having three basic characteristics: it increases with the degree of heterogeneity between the groups of the distribution, and with their internal homogeneity; and, as far as it concerns polarization, small groups are not very relevant. The last two characteristics, point out the differences between polarization

    and inequality since more internal homogeneity brings about a fall in inequality levels and

    2 This is true for the case of non-negative incomes and it applies in our case since we are taking into account hourly wages.

    3n1 The upper limits increase with n: in Theil, ln(n) and in CV, . See Cowell (1995) for more details.

     3

    an increase in polarization, and the highest level of inequality is reached when the entire income is gathered in only one individual.

    To measure polarization we shall use the measure described in Esteban, Gardín and Ray (1999) which is just an extension of Esteban and Ray’s initial proposal.

     We are interested in learning to what extent the distribution F is comprised by k

    groups, and the degree of intensity of the polarization associated to those k groups. A

    ~=(z,z,z,…,z; y,y,…y; p,p,…,p) simplified representation of F is given by a partition 012k12k12k

    which generates k groups, where the i-th group is defined by a share p of the workers i

    ,(z,zwhose wages fall within the interval and whose mean wage is y. When we use ~ ii1i

    to represent F we make an approximation error (F;~) that we define in terms of the degree

    of wage dispersion within the groups, measured by the Gini coefficient:

     :;F;~; G(F)-G;~;, (4)