Factors Driving Changes in Income Distribution in Post-Reform Mexico

After 1984 and following economic liberalisation, income inequality in Mexico has increased. Some of the main factors that have contributed to this trend are the relative expansion of the average income in the service sector in relation to the agricultural and manufacturing sectors, which is consistent with arguments such as the rise of services and the reduction of rents in the traded sector, the increase in skill premium, which is in keeping with the skill enhancing trade hypothesis, the fall in unionisation rates and capital concentration. On the other hand, between 1998 and 2002, inequality fell gradually and some of the factors driving this trend are the decrease in returns to skill and union premium, the stabilisation of unionisation rates and a faster movement of low income individuals to higher income activities. This trend is consistent with arguments suggesting temporary adverse effects and cycles in the evolution of income inequality over the longer-run. Households re-composition and transfer income are factors that mitigate inequality, whereas deterioration of the agricultural sector and capital concentration are persistent sources of income dispersion. Econometric analysis with aggregated data finds that the fall in unionisation rates increases inequality and international investment channelled into labour-intensive production has distributional effects. In addition, after a certain level of education its expansion decreases inequality, and decentralised government expenditure benefits income distribution. The study also finds that the relationship between growth and inequality became negative by the late 1980s.