Human Capital and Income Concentration in Brazil

High income concentration and poverty in Brazil have been intensively studied by many researchers, suggesting that an obvious factor influencing unequal earnings in the country is the heterogeneous level of education in the labor force; for education can be understood as a mean to attain improvements in labor productivity and consequently in family income. The present study aims to construct a recursive general equilibrium model where agents differ in their education levels and therefore face different employment opportunities. This dynamics is captured by a stochastic process characterized by a two stage Markov chain. The associated transition probability matrixes reflect both the fact that more educated agents face a higher probability of remaining employed if they are currently employed and, that they also have a higher probability of being employed next period if they are currently unemployed. The long run analysis of the model economy calibrated for the Brazilian economy shows that it can generate a high income concentration as observed in the empirical evidence.