The slippery slope: explaining the increase in extreme poverty in urban Brazil, 1976-1996

Despite tremendous macroeconomic instability, Brazil’s urban income distributions in 1976 and 1996 appear, at first glance, deceptively similar. Mean household income per capita was stagnant, with a minute accumulated growth of 4.3% over the two decades. The Gini coefficient hovered just above 0.59 in both years, and poverty incidence (with respect to a poverty line of R$60/month in 1996 prices) was effectively unchanged at 22%. Yet, behind this apparent stability, a powerful combination of labour market, demographic and educational dynamics were at work, one effect of which was to generate a substantial increase in extreme urban poverty. Using a micro-simulation-based decomposition methodology which endogenizes labour incomes, individual occupational choices and education decisions, we show that the distribution of incomes was being affected, on the one hand, by a decline in average returns to both education and experience, a negative ‘growth’ effect and immiserizing changes in the structure of occupations and labor force participation (all of which tended to increase poverty), and on the other hand by an increase in educational endowments across the distribution, and a progressive reduction in dependency ratios (both of which tended to reduce poverty). The net effect was small (and negative) for overall measured inequality, and negligible for poverty incidence with respect to ‘high’ poverty lines. But it was substantially positive (increasing) for extreme poverty, suggesting the creation of a group of urban households excluded from any labour market, and trapped in indigence.