The structure and dynamics of inequality in Guatemala

This thesis is an investigation of the evolution of economic inequality in Guatemala. High inequality and poverty levels in the country are two widespread social problems, almost defining characteristics of Guatemalan society. Although some research has been done in an attempt to understand poverty, far less has been done with respect to inequality. Aggregated measures of both phenomena do not reveal much change, although it may well be the case that different and countervailing forces are acting behind summary indices, providing a misleading interpretation of stagnation over time. Using data from two living standards measurement surveys (LSMS) in 2000 and 2006, this investigation applies a household income generation model and a series of microeconomic decomposition techniques in order to explain some of the factors driving economic inequality. Those factors are grouped into three types of effects: price, occupational choice and endowment. The results show that three structural conditions segment the population: geographical location, gender and ethnic origin. However, they also indicate that over the course of six years, those characteristics have reduced their negative influence on the standard of living of the population. In other words, over time they show a mild equalizing effect, probably the result of changes in market conditions, state actions or a combination of both. Regarding the three types of effects identified above, the results show how market returns to individual attributes (price effects), such as years of education, can act as an equalizing force, particularly for women in the 4th and 5th quintiles of the distribution. Occupational choice effects reflect changes in the structure of the labour force, moving from the inactive to the self-employed, thus generating higher household income. Endowment effects, simulated as changes in household size and stock of education of income earners, are consistent with mild changes in fertility rates and higher public investment in education. Finally, the results leave ample room for social policy. However, for that to occur it will be necessary to increase the capacity of the State to intervene in specific areas, thus requiring higher government revenues while also addressing other institutional challenges such as better targeting of social programs, improving the quality of primary health and education, and investing in secondary schools and hospitals. A third round of LSMS survey would help corroborate whether observed reductions in expenditure and income inequality are truly a trend or just a temporary phenomena or simply a statistical artefact.