Latin America’s Declining Skill Premium: A Macroeconomic Analysis

Juan F. Guerra-Salas

Economic Inquiry, 2017, doi:10.1111/ecin.12497.

Published versionWorking paper version: April 2017 (PDF) | Technical appendix (PDF)

Abstract:

The decline in Latin America’s skill premium and income inequality during the 2000s was partly driven by an economic expansion that favored low-skill-intensive service sectors. Evidence shows inequality becomes countercyclical in the 2000s, and unlike previous expansions, the boom of the 2000s was concentrated on services while manufacturing lagged behind. I build an open economy general equilibrium model that features a low-skill-intensive nontradable sector. The model suggests that favorable shocks to commodity prices and international interest rate spreads, such as those that buffeted Latin America in the 2000s, account for about a fifth of the observed decline in the skill premium.

JEL classification codes: D31, E32, F41, O15, O54.

Previously circulated as: “Fiscal Policy, Sectoral Allocation, and the Skill Premium: Explaining the Decline in Latin America’s Income Inequality,” Central Bank of Chile Working Paper N° 779.

Non-technical summary in Investigación al Día, the Central Bank of Chile’s quarterly research bulletin (in Spanish).