Characterization of inequality changes through microeconometric decompositions

A variant of the microeconometric decomposition methodology proposed by Bourguignon et al. (1998) has been applied in this paper in order to assess the relevance of various factors that affected inequality in Paraguay between 1992 and 2005. The results of this paper suggest that the smaller change in inequality between 1992 and 1997/98 is mainly as a result of employment (including hours of work) and education effects, characterized by a primary schooling expansion. The larger inequality reduction effect after 1997 is due to returns to education, hours of work (since unemployment increased) and unobservable factors. Maybe the most interesting finding of the paper is that the general trend towards an inequality decrease, was most certainly interrupted by the 2000 – 2002 economic crisis, but got back on track afterwards, finding a way to keep reducing inequality even during periods of poverty increase, comparing the post2002 period with 1997/98, when poverty was lower, but meanwhile inequality reduction was not as strong.