Universidade Federal de Pernambuco, Departamento de Economia

This paper investigates the sources of wage inequality across Brazilian regions. Duarte, Ferreira and Salvato (2003), using a semi-parametric approach based on DiNardo, Fortin and Lemieux(1996), show that income differences across the Southeast and Northeast can be explained by educational disparities across their population. This result implies that any policy recomendation should prescribe direct investments in education in order to narrow the regional income gap. In this paper we apply the methodology developed by Machado and Mata (2004), based on quantile regression and resampling techniques, for the metropolitan areas of Brazilian Southeast and Northeast. The technique allows us to decompose the wage inequality across regions into a part that can be attributed to changes in workers ’ observable characteristics and another to changes in the returns to these characteristics. First we show that the difference between NE and SE wage distribution has a higher mass on the lower tail, and lower density on the upper tail, resulting from the well known fact that Northeast have a higher number of people living on poverty and lower number of people on high paying occupations compared to Southeast. Both returns to skills and workers ’ observed characteristics have an impact on this result. However, different from what Duarte et al (2003) show on their paper, schooling did not respond for this wage inequality across the two regions. Returns to schooling did have a higher impact on wage inequality than the distribution of education per se. These results imply that investments on education alone may not be enough to narrow regional income inequality since the availability of capital and quality of education may be driving those results