The Effect of Unemployment on Labor Earnings Inequality: Argentina in the Nineties

In this paper we develop a methodology that allows us to quantify the effect of changes in unemployment rates on labor income inequality. We estimate individual earnings functions for employed people conditional on a working status polychotomous model and we establish a formal procedure to assign wages to unemployed workers. We simulate the probability distribution of unemployed persons of particular year on a base year. By computing inequality measures using the actual and simulated populations we are able to assess the impact of unemployment on earnings inequality. Additionally, we simulate changes in participation and in the returns to human capital. An application using microdata from Argentina is presented. The results suggest that unemployment accounts for a large part of the increase in earnings inequality that this country experienced between 1991 and 1998.