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Jorge Alvarez, Felipe Benguria, Niklas Engbom, and Christian Moser
We document a large decrease in earnings inequality in Brazil between 1996 and 2012. Using administrative linked employer-employee data, we fit high-dimensional worker and firm fixed effects models to understand the sources of this decrease. Firm effects account for 40 percent of the total decrease and worker effects for 29 percent. Changes in observable worker and firm characteristics contributed little to these trends. Instead, the decrease is primarily due to a compression of returns to these characteristics, particularly a declining firm productivity pay premium. Our results shed light on potential drivers of earnings inequality dynamics.
Jorge Alvarez, Felipe Benguria, Niklas Engbom, Christian Moser, and Mr. Chris Papageorgiou

1 Introduction Since the mid-1990s, Brazil has experienced a large reduction in earnings inequality resembling the experience of other Latin American economies during this period. This decrease in earnings inequality stands in stark contrast to that of the US and many developed countries, which saw inequality steadily increasing over the past two decades. 1 This paper studies the sources of this decrease. To this end, we exploit a large administrative linked employer-employee dataset containing information on hundreds of millions of job spells between