The Reversal of Inequality Trends in Colombia, 1978-95 : A Combination of Persistent and Fluctuating Forces

Between 1978 and 1995, Colombia made a U-turn in income inequality and underwent significant changes in key socio-demographic characteristics and labor market indicators. The dynamics of inequality were asymmetric: while rural inequality improved, the opposite happened in urban areas with predominant effects on national income distribution. In this paper we measure the specific contributions of determinant factors of household income to the dynamics of urban and rural inequality for the periods 1978-88 and 1988-95. Using a microeconomic reduced form model of individual labor earnings and labor market participation and occupational choice, we decompose the changes in inequality derived from variations in (i) the returns to human assets -- education and experience -- and the residual variance; (ii) the changes in endowments of human assets -- schooling and in family size; and (iii) the structural changes in labor force participation and occupational choice. Our findings show that periods of moderate inequality changes conceal strong counterbalancing effects of equalizing and unequalizing forces. The dynamics of income inequality in Colombia might be decomposed as a combination of persistent and fluctuating forces. In urban areas the four persistent factors are jointly unequalizing: education endowment equalization, family size, non-labor income and participation and occupational choice -- at the individual level. However, the larger and unstable effects of five other fluctuating factors dominate them -- e.g. returns to education. Paradoxically, education endowment equalization worsens income inequality in urban areas but improves it in rural areas. This apparent contradiction can be explained by the large differences in returns to education prevalent in the urban areas. It is also surprising that increasing participation of less skilled women generated asymmetric effects between household and individual wage distributions. Although households appear to exacerbate static inequality among workers, they also attenuate the changes in individual income inequality produced by each determinant factor. Finally, unless the increasing trend of skill wage differentials is reversed, the aggregate effect of persistent inequality determinants leads to expect an increasing deterioration of long run inequality trends