The Educational Transition and Decreasing Wage Inequality in Chile

The wage of the 90th (richest) percentile of the wage distribution in Chile increased faster than the median wage and the wage of the 10th percentile between 1975 and 1990. By contrast, from 1990 onwards the wage of the 10th percentile and the median wage grew faster than the 90th percentile. This is one of many findings showing that wage inequality in Chile has been falling, first slowly, then faster, over the last two decades. This pattern emerges clearest once cyclical components of wage inequality measures are removed. To understand the driving forces behind the decrease in wage inequality, we group workers according to their cohort and educational attainment, and decompose the variance of logwages into the sum of the withinand between-group variances. We find that the significant decrease in inequality observed since the mid 1990s is due mainly to a decrease in the betweengroup variance. We present evidence suggesting that this decrease was due to a secular decrease of the skill premium for tertiary education that resulted from the deregulation of this market in 1980. Somewhat surprisingly, the marked decrease in the skill premium can be found in the data one decade earlier, yet the corresponding decrease in wage inequality was canceled by a Kuznets-type effect, where an increasing but still small fraction of workers with tertiary education led to more inequality, during the 1985–1995 period.