Changes in the distribution of income and the New Economic Model in Colombia

Abstract

Abstract This paper has analyzed the changes in the distribution of income in Colombia since 1976 using data for urban economy (seven largest metropolitan areas) and for the manufacturing sector. Evidence is shown that the structural reforms that took place in the early 1990s have been related to higher income concentration in Colombia, where levels of inequality were already impressively high. The results suggest that both trade liberalization and skill complementary technological change have a positive impact on skill premiums. The evidence presented suggests that skill complementary technological change has been a key force behind the recent increase in the relative demand for more-educated workers. Much of the change in skill intensity has taken place within specific industries, rather than involving large reallocations between sectors. Trade reform has not resulted in a greater expansion of skill intensive sectors relative to unskilled intensive sectors. Quite the contrary, trade liberalization and other reforms, which lowered the user cost of capital and relaxed liquidity constraints, facilitated investment in skill complementary technologies within all sectors of production. Further evidence in this direction is provided by the fact that the largest increases in the relative earnings of the more educated workers took place in the non-traded sectors. The results suggest that both trade liberalization and skill complementary technological change have a positive impact on skill premiums. As the evidence presented in this paper shows, the structural reforms have been related to higher income concentration in Colombia, a country with already impressively high levels of inequality. For this reason, a better understanding of the relationship between the reforms and distribution is crucial to assess the future of the full reform agenda. Obviously this process has to be consistent with higher levels of growth, lower poverty and more equitable distribution of income.