This paper analy­zes the dyna­mic effects of fis­cal con­so­li­da­ti­on epi­so­des on dis­po­sa­ble inco­me, mar­ket inco­me, hourly wage, and func­ti­o­nal ine­qua­li­ti­es in Latin Ame­ri­ca and the Carib­be­an, uti­li­zing a nar­ra­ti­ve annu­al data set cove­ring 1989–2016 (David and Leigh, 2018). Using the metho­do­logy pro­po­sed by Jordà (2005), we deri­ve impul­se res­pon­se func­ti­ons from local pro­jec­ti­ons and con­duct a com­prehen­si­ve Gini decom­po­si­ti­on analy­sis to analy­ze three chan­nels through whi­ch aus­te­rity affects ine­qua­lity: the redis­tri­bu­ti­ve effect, wage ine­qua­lity, and func­ti­o­nal ine­qua­lity. Our base­li­ne fin­dings indi­ca­te that eight years after a fis­cal con­so­li­da­ti­on epi­so­de, the hourly wage ine­qua­lity index incre­a­ses by 2.26%, and the labor sha­re in inco­me decli­nes by 1.9%. This sug­gests that both chan­nels play a sig­ni­fi­cant role in explai­ning the rise in ine­qua­lity. Regar­ding the redis­tri­bu­ti­ve chan­nel, we found that the redis­tri­bu­ti­on mea­su­re res­ponds posi­ti­vely to fis­cal shocks in the short run, sug­ges­ting the cru­ci­al role of the soci­al safety net in miti­ga­ting imme­di­a­te ine­qua­lity impacts. Howe­ver, the redis­tri­bu­ti­ve effect decre­a­ses in the medium run after tax-based fis­cal episodes.

Key words

Fis­cal aus­te­rity, wage ine­qua­lity, func­ti­o­nal ine­qua­lity, local pro­jec­ti­ons, Latin Ame­ri­can countries

JEL codes

D30, D60, E60, E62