OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

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Deconstructing income inequality in Costa Rica

An income source decomposition approach

Despite an improvement in overall macroeconomic performance in Costa Rica, income inequality has risen and is currently at its maximum historical value. This is in stark contrast with other Latin American countries, which have recently made significant progress in reducing inequality. This study analyses the drivers of inequality in Costa Rica by decomposing the Gini coefficient by income source, finding that the main contributor to inequality in Costa Rica is labour income. In the period 2010-2014, public sector wages made the largest contribution to inequality, in particular wages of qualified workers. Within the public sector, wages of those working in public agencies outside central government contributed the most. Inequality has also been driven by a large and increasing skills premium in the private sector. Workers holding a tertiary degree earn, on average, nearly four times as much as those with only primary education. Social programmes, such as non-contributory pensions, do contribute to reduce inequality but their impact is limited given its small share in households’ total income. The analysis also quantifies the marginal effect on inequality of the different income sources, finding that an increase in wages of low qualified workers in the private sector would have the largest marginal impact to reduce inequality. Conversely, increases in wages of qualified workers in public and private sector would result in the highest increases in inequality.


Keywords: skills premium, gini coefficient, income inequality, income source decomposition, wages
JEL: O15: Economic Development, Innovation, Technological Change, and Growth / Economic Development / Economic Development: Human Resources; Human Development; Income Distribution; Migration; D31: Microeconomics / Distribution / Personal Income, Wealth, and Their Distributions; H53: Public Economics / National Government Expenditures and Related Policies / National Government Expenditures and Welfare Programs; J30: Labor and Demographic Economics / Wages, Compensation, and Labor Costs / Wages, Compensation, and Labor Costs: General; J31: Labor and Demographic Economics / Wages, Compensation, and Labor Costs / Wage Level and Structure; Wage Differentials
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