Inequality and Household Size: A Microsimulation for Uruguay

Declines in fertility and consequently in household size are among the main demographic changes that took place in many Latin American countries during the last decades. This demographic alteration may have had an impact on income distribution in case the patterns of decline were not similar between rich and poor households. In order to understand the driving forces of inequality changes in Uruguay, we consider the role of differential changes in reproductive behaviour and household formation on inequality and also on poverty, for two time periods (1996-2007 and 2007-2013). We estimate the effects of changes in the number of children in the household on mean income and specially, on the distribution of income and on poverty. Based on microsimulation techniques, our results indicate that both poverty and inequality would have been lower if changes in household size had not taken place among Uruguayan households. This ultimately implies that changes in fertility have contributed to higher levels of poverty and inequality, although the size of the total effect is not large. These results are mainly driven by a direct channel dominated by the evolution of the parameters that govern decisions about number of children in the household. Indirect effects, through the labour market, operated in a countervailing manner but due to their smaller magnitude, they were offset by the direct effect.