Determinants of Inequality in Latin America and Eastern Europe

How do structural transformations affect the income distribution in Latin America and Eastern Europe? This dissertation reveals that deindustrialization, the expansion of the service sector, and the growth of the commodity-producing sector have a meaningful impact on market, or pre-taxes-and-transfers, income inequality. This effect depends on each economy's human capital endowments, on the type of primary goods that it specializes in, and on the ability of different commodities to contribute resources to governments' coffers. Chapter 2 focuses on the manufacturing and the service sectors. I argue that a higher proportion of the labor force employed in services is linked to higher market income inequality in both regions. The service sector is very diverse, with different productivity and skill levels, which means that income differentials tend to be higher among workers. In contrast, deindustrialization is likely to have a differential effect on inequality in the two regions. A larger industrial sector is correlated with lower market income inequality in Eastern Europe. This is because the region's skill endowment is sufficiently high to keep the educational premium low. This is very different from Latin America, where the industrial sector is capital-intensive and qualified workers are scarce, driving the educational premium up. Consequently, a larger industrial sector in Latin America is associated with higher market income inequality. Chapter 3 examines dynamics in the primary sector in Eastern Europe. I argue that the decline in the proportion of the labor force employed in agriculture exacerbated market income differentials during the 1990s and the 2000s. The sector had provided jobs for low-skill workers whose employment prospects were highly unfavorable in the years of the transition. The loss of these jobs as the sector modernized hurt low-income households particularly hard. The inflow of primary goods imports had a similar effect on the income distribution as it drove many local producers who could not withstand competitive pressures out of the market. As a result, domestic producers of commodities transitioned to a capital-intensive method of production. Because of this, exports of primary goods from the region are also correlated with rising income inequality. Chapter 4 analyzes similar processes in Latin America, which has been a major commodity producer throughout its history. I find that higher agricultural employment, crop and food production, and foods and metals exports are associated with lower market income inequality across Central and South America during the 1990s and the 2000s. In contrast, rising fuel exports are correlated with widening income differentials. Specialization in the production of commodities (excluding fuels) generates income gains for the low and the middle classes and decreases the income share of the top quintile. When Central American countries are excluded from the analysis, however, the effect of the primary sector on market income inequality is weaker and less conclusive. Food exports in continental Latin America are associated with higher inequality while fuel exports and crop and food production lose statistical significance. These findings reveal the different importance, composition, and profile that the primary sector has across the region and suggest that commodity production absorbs more labor in Central America.Doctor of Philosoph