Nominal Devaluations, Inflation and Inequality

Abstract

We study the distribution of labor income during large devaluations. Across countries, inequality falls after large devaluations within the context of a surge in inflation and a fall and subsequent recovery of real labor income. To better understand inequality dynamics, we use a novel administrative dataset covering the 2002 Argentinean devaluation. We show that following a homogeneous fall in real labor income across workers, the bottom of the income distribution recovers faster than the top. Low labor mobility and lack of union coverage among high-income workers explain their slow recovery.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.