New perspectives from the decomposition of Brazilian income inequality: finding a greater importance of formalization

Abstract

This paper analyzes the determinants of income inequality by applying a new method of decomposition for the Brazilian context. This method, developed by Cowell and Fiorio (2011), link the source-decomposition and the subgroup decomposition with recent decomposition techniques based on regression analysis. In this paper, income inequality was decomposed by economic sectors (agriculture, industry, and service), and the inequality in each sector was decomposed according to the impact of each explanatory variable. Using the National Household Sample Survey (Pnad) of 2013, this study focuses on the Brazilian case as well as on the Northeast and Southeast of the country. In contrast to what the national literature has shown, the results in this paper indicate that formalization is, in some sectors and regions, more relevant than education to explain income disparities in the labor market. For instance, 11.37% of the inequality in the agricultural sector comes from formalization, while 9.82% is due to education.