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In this study, we document the decline in income inequality and a convergence in consumption patterns in Brazilian states in a new database constructed from micro data from the national households’ survey. We adjust the state-Gini coefficients for spatial price differences using information on households’ rental prices available in the survey. In a panel regression framework, we find that labor income growth, formalization, and schooling contributed to the decline in inequality during 2004-14, but redistributive policies, such as Bolsa Família, have also played a positive role. Going forward, it will be important to phase out untargeted subsidies, such as public spending on tertiary education, and contain growth of public sector wages, to improve budgetary efficiency and protect gains in equality.

Labor --- Macroeconomics --- Multiple or Simultaneous Equation Models: Models with Panel Data --- Personal Income, Wealth, and Their Distributions --- Equity, Justice, Inequality, and Other Normative Criteria and Measurement --- National Government Expenditures and Education --- National Government Expenditures and Welfare Programs --- Economic Development: Human Resources --- Human Development --- Income Distribution --- Migration --- Aggregate Factor Income Distribution --- Education: General --- Wages, Compensation, and Labor Costs: General --- Education --- Labour --- income economics --- Income --- Income inequality --- Income distribution --- Wages --- National accounts --- Brazil --- Income economics

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The linearity of the relationship between income inequality and economic development has been long questioned. While theory provides arguments for which the shape of relationship may be positive for low levels of inequality and negative for high ones, most of the empirical literature assumes a linear specification finding conflicting results. Employing an innovative empirical approach robust to endogeneity, we find pervasive evidence of nonlinearities. In particular, similar to the debt overhang literature, we identify an inequality overhang level in that the slope of the relationship between income inequality and economic development switches from positive to negative at a net Gini of about 27 percent. We also find that in an environment characterized by widespread financial inclusion and high income concentration, rising income inequality has a larger negative impact on economic development because banks may curtail credit to customers at the lower end of the income distribution. On the positive side, a sufficiently high female labor participation can act as a shock absorber reducing such negative impact, possibly through a more efficient allocation of resources.

Econometric models. --- Econometrics --- Mathematical models --- Finance: General --- Macroeconomics --- Women''s Studies' --- Aggregate Factor Income Distribution --- Labor Economics: General --- Personal Income, Wealth, and Their Distributions --- Economics of Gender --- Non-labor Discrimination --- Financial Markets and the Macroeconomy --- Economic Development: Human Resources --- Human Development --- Income Distribution --- Migration --- Economic Growth and Aggregate Productivity: General --- Labour --- income economics --- Gender studies --- women & girls --- Finance --- Income inequality --- Labor --- Personal income --- Women --- Financial inclusion --- National accounts --- Gender --- Financial markets --- Income distribution --- Labor economics --- Income --- Financial services industry --- Argentina --- Income economics --- Women & girls --- Women's Studies