Varieties of functional income inequality in Latin America: Chile and Mexico compared

Contributing to a better understanding of the varying inequality patterns within Latin America, this paper examines the drivers of the private sector labour shares of Chile and Mexico between 1980-2011. Over this period, Chile’s labour share has declined, similar to many advanced economies, while Mexico’s labour share has remained relatively stable. Our historical and econometric analysis suggests that in Chile high private indebtedness has undermined wage demands and induced wage cuts, whilst policies of small government have also contributed to the decline in its wage share. Chile’s natural resource exports have benefitted from Latin America’s commodity boom and exhibited some limited positive effects on its wage share. Contrariwise, we find that Mexico, as a more capital-intensive economy, has experienced significant substitution effects, which have undermined its wage share. Yet, high government spending has counterbalanced the negative effects of globalization. These comparative results challenge popular narratives around hyper-globalization and policy homogenization.