The Slippery Slope: Explaining the Increase in Extreme Poverty in Urban Brazil, 1976-96

Abstract:     
During the turbulent years 1976-96, aggregate data for Brazil appear to show only small changes in mean income, inequality, and incidence of poverty - suggesting little change in the distribution of income. But a small group of urban households - excluded from formal labor markets and safety nets - was trapped in indigence. Based on welfare measured in terms of income alone, the poorest part of urban Brazil has experienced two lost decades.

Despite tremendous macroeconomic instability in Brazil, the country's distributions of urban income in 1976 and 1996 appear, at first glance, deceptively similar. Mean household income per capita was stagnant, with minute accumulated growth (4.3 percent) over the two decades. The Gini coefficient hovered just above 0.59 in both years, and the incidence of poverty (relative to a poverty line of R$60 a month in 1996 prices) remained effectively unchanged over the period, at 22 percent.

Behind this apparent stability, however, a powerful combination of labor market, demographic, and educational dynamics was at work, one effect of which was to generate a substantial increase in extreme urban poverty.

Using a decomposition methodology based on microsimulation, which endogenizes labor incomes, individual occupational choices, and decisions about education, Ferreira and de Barros show that the distribution of income was being affected by:
- Three factors that tended to increase poverty - a decline in average returns to education and experience, a negative growth effect, and unfortunate changes in the structure of occupations and participation in the labor force.
- Two factors that tended to reduce poverty - improved educational endowments across the board, and a progressive reduction in dependency ratios.

The net effect was small and negative for measured inequality overall, and negligible for the incidence of poverty (relative to high poverty lines).

But the net effect was to substantially increase extreme poverty - suggesting the creation of a group of urban households excluded from any labor market and trapped in indigence.

Above the 15th percentile, urban Brazilians have stayed put only by climbing hard up a slippery slope. Counteracting falling returns in both self-employment and the labor market required substantially reduced fertility rates and an average of two extra years of schooling (which still left them undereducated for that income level).

This paper - a product of the Poverty Division, Poverty Reduction and Economic Management Network - is part of a larger effort in the network to understand the determinants of urban poverty. Francisco Ferreira may be contacted at [e-mail].

Number of Pages in PDF File: 54

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