SOCIAL SPENDING EFFECT ON INCOME INEQUALITY: AN ANALYSIS FOR LATIN AMERICAN ECONOMIES

This paper analyses the determinants of income inequality in Latin American countries using a panel dataset from 1980 to 2000, focusing on topics such as education, health, and social security expenditures. Previous research was used to solve the endogeneity of the social spending variables in the income inequality equation. In addition to this, this study undertakes 2SLS and GMM methods in order to control the correlation of some of the regressors with the disturbance term. While government expenditure affects inequality, an increase in inequality may be related to social, economic and political changes that can also affect government expenditures. Therefore, social spending is potentially endogenous in the inequality regression and, unless this source of endogeneity is accounted for, the estimated parameters will be not consistent. Results show that social spending variables are endogenous with income inequality index. Once endogeneity is controlled, education and health expenditures have a negative effect on income inequality, while social security expenditures have no effect on income inequality. Findings also evidence that models, which do not take into account endogeneity of social spending variables, overestimate the effects of education and health spending.