In this paper, published in the American Economic Journal: Macroeconomics, Alvarez, Benguria, Engbom and Moser (2018) document a large decline in earnings inequality in Brazil between 1996 and 2012. Using administrative linked employer-employee data, they fit high-dimensional worker and firm fixed effects models to identify the sources of this decline. Firm effects account for 45 percent of the total decline and worker effects for 24 percent. While pay-relevant firm and worker characteristics became more dispersed over the period,the inequality decline is driven by falling returns in pay to these variables. They conclude that changes in pay policies,rather than changes in firm and worker fundamentals, played a significant role in Brazil’s inequality decline.
