Earnings inequality in Brazil: is it permanent or transitory?

Abstract

This paper seeks to analyze the dynamic behavior of prime-age male workers’ earnings inequality in the formal labor market of the State of S˜ao Paulo in the years 1990-1998. The aim is to fit an econometric model of unobserved earnings components into the empirical earnings variance-covariance structure in order to evaluate the relative magnitude of individual characteristics and earnings instability as factors behind overall inequality. The analysis is based on a panel dataset constructed from RAIS data (official formal labor market data); several different models are estimated and tested using minimum distance techniques. Our results show that (i) the relative magnitude of the earnings instability component of inequality is much smaller than the individual characteristics component, and (ii) the observed heterogeneity, as accounted by education and age, explains only a little part of the inequality derived from individual characteristics.