Abstract – This article studies how the recent fall in wage inequality in Brazil affected individual allocations and welfare. It first documents the evolution of wage inequality in the country between 1996 and 2009. Then, it constructs a parsimonious structural model of the Brazilian economy, which is based on a standard Yaari perpetual youth model in which agents are heterogenous in their skills and on their idiosyncratic labor productivity. The model is calibrated to match, besides other statistics, the skill wage premium, the share of skilled workers in the labor force and the cross sectional variance on unobservable wage inequality in Brazil in 1996 and 2009. Our simulations show that the fall in wage inequality in Brazil from 1996 to 2009 generated an average welfare gain equivalent to a 2.24 percent permanent increase in annual consumption. The gains were distributed unevenly: While welfare gains were large for poor individuals (e.g., about 16 percent in permanent consumption for the first income decile), workers in the top of the income distribution experienced, in general, welfare losses (e.g, a loss of 6 percent in permanent consumption for the last income decile). Using counterfactual exercises we also study the importance of different structural factors which shaped inequality on individual welfare.
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