The relationship between income inequality and inequality of opportunities in a high-inequality country: the case of Chile

Abstract

Based on Bourguignon et al. (2005, 2007), we explore the extent to which income inequality in Chile is associated with inequality of ‘opportunities’, proxied by inequality in observed socioeconomic circumstances of origin. We found that equalizing a diverse set of observed circumstances across individuals reduces the Gini and the Theil coefficients by about 15 and 25%, respectively. Almost half of the effect of observed circumstances on incomes is transmitted directly to earnings, whereas the rest is indirectly transmitted through the accumulation of schooling. Further results suggest that the influence of unobserved circumstances on income inequality may be limited; hence aspects such as preferences, choices, transitory income shocks and income measurement errors may be important factors behind observed income inequality.

Acknowledgements

We are grateful to Jeremy Behrman, Esteban Puentes and Facundo Sepúlveda for their very valuable and helpful comments on a previous version. We thank the support of project Anillos Soc 12, Conicyt, Chile. As usual, the authors are responsible for all errors.

Notes

¹The latter view has acquired some salience, as suggested, for example, by The World Bank in the 2005 Report on Equity and Development: ‘By equity we mean that individuals should have equal opportunities to pursue a life of their choice and be spared from extreme deprivation in outcomes’, (p. 2).

²See Roemer (1996, 1998, 2000) and Dworkin (1981) for descriptions of the notions of equality of opportunities and of outcomes. Also, Amartya Sen's Capability approach has a resemblance to the notion of equality of opportunities, as described for example in Sen (1999) and Nussbaum and Sen (2000). Alesina et al. (2004) discuss the different attitudes between Europeans and Americans towards both notions of equality. For a survey of empirical contributions on equality of opportunity, see Bourguignon et al. (2007), Guzman and Urzua (2009) and Contreras et al. (2009) for other evidence for Chile.

³Núñez and Gutiérrez (2004) provide evidence suggestive of class-discrimination in Chile.

⁴Note that estimating Equation 2(2) by ordinary lease squares yields .

⁵Note, however, that term U _i can still include the direct effect of unobserved circumstances on earnings; However, in the earnings regressions we include potential experience as an independent variable, which adds another source of variation in the simulated incomes.

⁶Using alternative age thresholds yields similar results to those reported below.

⁷Average income and rural percentage of Municipalities were obtained from the 1994 National Socio-Economic Characterization Survey, the oldest one with an important number of municipalities with representative data.