Changes in human capital and earnings inequality: Recent evidence from Brazil 1

Abstract

This paper estimates changes in the rates of return to human capital across the earnings distribution using data from over a 10-year period for Brazil. It uses these estimates to simulate the separate impacts of changes in returns to skills and changes in the supply of skills on earnings inequality. Evidence points strongly to growing inequality in rates of return to education in Brazil. This finding suggests that recent macroeconomic and trade reforms have been of most benefit to the skilled rather than the unskilled. Supporting evidence points to an improved competitiveness in the labour market, with workers increasingly rewarded for productivity. However, although increases in returns to education are more pronounced at the top of the earnings distribution, this did not in practice led to increased inequality. This is because levels of education and other labour market-rewarded endowments have increased and offset the rate of return effect. Appropriate education policy is therefore an essential partner for macroeconomic and trade reform if a developing economy is to avoid worsening income inequality.