Mexico: Selected Issues

Selected Issues

Abstract

Selected Issues

Inequality and Social Policies1

This note summarizes the results of an analysis of income inequalities and government transfers using microdata from Mexico’s survey on household income and expenditures (ENIGH). It highlights the positive role played by government transfers in reducing inequalities over 2004–2016 and suggests that there is scope for better targeting existing social programs.

A. Income Inequality in Mexico

1. Mexico has a high level of income inequality compared to other OECD countries. The Gini coefficient2 in Mexico far exceeds the OECD average and is just equal to the Latin American average. Similarly, the ratio of average income of the top 20 percent to the average income of the bottom 20 percent of the income distribution is twice as high in Mexico than in other OECD countries (Figure 1).

Figure 1.
Figure 1.

Mexico: Inequality in Mexico and Regional and Income Peers

Citation: IMF Staff Country Reports 2018, 308; 10.5089/9781484383711.002.A003

2. Inequality has only slightly declined over the last decade. In contrast, the average Gini coefficient in Latin American countries has fallen substantially (Figure 2). The commodity price boom, which increased demand for low skilled labor, played a significant role in that fall (IMF, 2018). However, that boom did not affect Mexico much, as its economy is more diversified and as it exports mostly manufacturing products. Still, the average annual growth of household income over the period 2004–16 decreased nearly monotonically across income deciles.

Figure 2.
Figure 2.

Mexico: Recent Trends

Citation: IMF Staff Country Reports 2018, 308; 10.5089/9781484383711.002.A003

3. Despite significant differences in average income levels, inequalities between states represent less than 10 percent of total inequality (Figure 3). An alternative measure of inequality, the Theil index, can be decomposed into “between” and “within” inequality.3 This decomposition shows that the “within” inequality amounts to at least 55 percent of overall inequality. Inequalities between states, rural and urban areas, industries, and formal and informal sectors each account for less than 10 percent of overall inequality. However, inequality between different education levels is sizable and accounts for around 20 percent of total inequality, but its importance has decreased between 2004 and 2016, as returns to schooling have declined.4

Figure 3.
Figure 3.

Mexico: “Between” and “Within” Inequality

Citation: IMF Staff Country Reports 2018, 308; 10.5089/9781484383711.002.A003

4. Labor income remains the main source of income inequality. The Gini coefficient based on labor income only (wages and self-employment income) was close to 0.54 in 2016. Capital income tends to compound labor income inequalities, which on the contrary, public and private transfers contribute to reduce.5 A Shapley decomposition of the change in the Gini coefficient between 2004 and 2016 shows that labor income contributed to a small increase in inequality over the period, which was more than offset by government transfers. This attests to the significant redistributive role of public transfers in Mexico, although that role remains much smaller than in peer countries.

Figure 4.
Figure 4.

Mexico: Sources of Income Inequality

Citation: IMF Staff Country Reports 2018, 308; 10.5089/9781484383711.002.A003

B. The Role of Government Transfers

5. Transfers and taxes play a much more limited role in alleviating inequalities in Mexico than in other OECD countries. The Gini reduction effect of transfers and taxes is lower in Mexico than in all OECD countries. This limited redistributive role of fiscal policies in Mexico may result from a tax system that is insufficiently progressive. It also reflects the low level of public social spending as a share of GDP, in particular on non-contributory cash transfers targeted at the poorest households.

Figure 5.
Figure 5.

Mexico: Redistributive Role of Transfers and Taxes

Citation: IMF Staff Country Reports 2018, 308; 10.5089/9781484383711.002.A003

6. After a modest increase over 2007–2015, public social spending as a share of GDP has fallen in the last two years.6 Public social spending increased by 2.5 percent of GDP from 2007 to 2015, reaching a maximum of 12.1 percent of GDP, before shrinking to 10.4 percent in 2017. Social assistance and education, the first two components of public social spending, absorb together more than 60 percent of the total, while health expenditures amount to close to a fourth.

Figure 6.
Figure 6.

Mexico: Public Social Spending in Mexico

Citation: IMF Staff Country Reports 2018, 308; 10.5089/9781484383711.002.A003

7. Mexico’s social assistance programs cover well households at the bottom of the income distribution. 31 percent of the households in the bottom income quintile benefit from Mexico’s conditional cash transfer program Prospera (formerly known as Oportunidades and initially launched as Progresa), which has served as a model for many countries around the world (Parker and Todd, 2017). Similarly, the share of households benefiting from old-age social assistance is three times higher in the first income quintile than in the fifth one. Prospera and old-age social assistance programs account for about ¾ of the decline in the Gini coefficient coming from government transfers, while they represent about half of the total government transfer amount received by an average household.

8. Other social benefits are less well targeted. Individuals in the bottom income quintile receive less than 30 percent of total social transfers, a smaller share than in other Latin American and OECD countries (Figure 7, top left panel). The farmland subsidies program Proagro (formally Procampo) benefits a greater share of households in the bottom income quintile than in any other quintile, but the average amount received by household in the top quintile is only marginally lower than the average transfer amount to households in the bottom quintile and higher than in the middle three quintiles.

Figure 7.
Figure 7.

Mexico: Social Benefits

Citation: IMF Staff Country Reports 2018, 308; 10.5089/9781484383711.002.A003

9. Non-monetary government transfers covering medical expenses benefit the same proportion of households in all five income quintiles. However, the transfer amounts increase with income, following the growth of healthcare expenditures with income and resulting in richer households getting a higher share of their health expenditures covered by the government (Figure 7, middle right panel).

10. Government scholarships for secondary education accrue more frequently to households in the top half of the income distribution, while scholarships for primary and tertiary education are more evenly distributed (Figure 7, bottom left panel). In addition, the scholarship amounts are much higher for students enrolled in tertiary education institutions, which are more likely to belong to top income deciles. Government scholarships thus increase inequalities.

11. A comparison of the effect of various government transfer programs on inequality confirms the predominant role played by Prospera and old-age social assistance programs. Those programs account for 74 percent of the reduction in the Gini coefficient achieved by government transfers (Figure 8).

Figure 8.
Figure 8.

Mexico: Gini Coefficient With and Without Government Transfers

Citation: IMF Staff Country Reports 2018, 308; 10.5089/9781484383711.002.A003

Sources: INEGI; IMF staff calculations.

References

  • Del Castillo Negrete Rovira, Miguel (2017), “Income Inequality in Mexico, 2004–2014,” Latin American Policy, Vol. 8, 1, 93113.

  • IMF, 2018, “Poverty and Inequality in Latin America: Gains during the Commodity Boom but an Uncertain Outlook.” Western Hemisphere Regional Economic Outlook, April.

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  • López-Calva, Luis Felipe, and Santiago Levy Algazi, 2016, “Labor Earnings, Misallocation, and the Return to Education in Mexico.” IDB Working Paper, IDP-WP-671, February.

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  • Scott, John, Enrique de la Rosa, and Rodrigo Aranda, 2017, “Inequality and Fiscal Redistribution in Mexico, 1992–2015.” WIDER Working paper, 2017/194, November.

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1

Prepared by Frederic Lambert and Hyunmin Park (WHD).

2

The Gini coefficient takes values between zero and one. The closer the Gini coefficient is to zero, the more equally distributed is income (or consumption, or wealth); the closer it is to one, the higher the inequality.

3

The Theil index is defined as the weighted average of the log of the ratio of individual income to average income:

T=1nΣi=1n[yiylogyiy¯],

where n denotes the total number of individuals, yi is the income of individual i, and y¯ is the average income in the population.

4

The decline in returns to education has been attributed to the increase in the supply of skilled labor and the misallocation of resources (Levy and Lopez-Calva, 2016).

5

Capital income tends to be under-reported in ENIGH and a comparison of ENIGH data with national accounts suggests this under-reporting may have increased over time (del Castillo Negrete Rovira, 2017).

6

Scott, de la Rosa and Aranda (2017) argue that this decline in social spending after 2015 was compounded by a significant reduction in indirect subsidies, in particular on gasoline. The latter is not addressed in the analysis presented here.

Mexico: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.