The Dynamics of Income Inequality in Mexico since NAFTA

Abstract

This paper reviews the pattern of income inequality in Mexico since 1994. It shows that in the past few years there has been an important reduction in income inequality in Mexico, which has almost reverted the sharp increase in inequality observed between 1984 and 1994. Using a Gini decomposition exercise we conclude that labor income, transfers and remittances have all played an important role in this process. We also argue that the equalizing effect of labor income and the reduction of wage inequality in Mexico can be explained by a structural change in Mexico’s workforce composition in terms of education and experience. In general, we conclude that the recent reduction of inequality in Mexico is due to the interaction of both, the market and the State.