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Analysis of Poverty and Inequality in
Bolivia, 1999-2005: A Microsimulation Approach
Claudia Gutierrez
January 2008
This paper studies the changes in inequality
and poverty in the period 1999-2005 in Bolivia through the
analysis of the changes in the labour market. A decomposition
method based on micro-simulation techniques was applied. The
decomposition works with an income generation model at the
household level, which is a set of equations for the individual
earnings and for the labour supply and occupational choices for
each member of the household. We decomposed the observed change
in inequality into four components: i) a shift in the income
distribution related to a change in employment rates and the
shares of wage and non-wage labour among the employed population
(participation effect); ii) a shift related to changes in the
remuneration of observed characteristics of the employed
population (price effect); iii) a shift related to a change in
the distribution of error terms of estimated earnings functions
(error term effect); and iv) a residual change in inequality not
captured by the first three simulated changes in the income
distribution. According to our results the increase in
inequality of 3 points of the Gini coefficient, was explained by
approximately 1 point for the participation, price and error
term effects and 2 points for the residual change. The increase
in the unemployment rate, the shift in the participation of the
non wage earners, the rise in wages and the more unequal
distribution of unobserved productive talents deteriorated the
income distribution in this period in Bolivia. Regarding the
poverty incidence, the observed variation was a reduction by 3
points explained mainly by the residual change. The low
magnitude of the simulated effects as determinants of the
decline in poverty in those years can be explained by the rising
participation of the non labour incomes in the total household
income.
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