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The Problem of Income Inequality in South Africa

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Chapman, Geoffrey Scott (2012). The Problem of Income Inequality in South Africa. Paper presented at 'Towards Carnegie III', University of Cape Town, 3-7 September 2012. University of Cape Town (Carnegie III conference).
Type conference paper
Scope Post-1994 South African economy
Method econometric
Period studied 1990–2009
Regions South Africa
Themes inequality poverty unemployment, labour markets wages, unions strikes, transition post apartheid, macro fiscal finance debt, methods data sources
Citation key chapman2012

Argument

The paper asks why income inequality in South Africa stayed extreme (Gini above 0.6) after 1994 despite stable growth, low inflation and trade integration. Using the Seekings-Nattrass 'labour-welfare nexus', it argues that every pillar was in place except employment and wage-setting institutions. It attributes high unemployment, and hence persistent inequality, to labour-market rigidity and union wage power. It supports this with a log-linear time-series regression of the Gini on 20 annual observations (1990-2009), modelled on three international studies of transition and OECD economies. The model finds that GDP per capita, manufacturing employment share, industrial value-added growth and union membership are associated with lower Gini, while government consumption is associated with higher Gini. The paper concludes with a normative case for wage flexibility, coordinated wage restraint and a youth wage subsidy.

Evidence and method

Secondary literature, chiefly OECD (2010a, 2010b) and Bhorat et al. (2010). Gini series from AMPS and IES (National Planning 2010) and WIDER (WIID) for 1959-1990. SARB, StatsSA, ILO, World Bank and Polity IV data for the regression. International models from Milanovic & Ersado, Ivaschenko and Alderson & Nielsen. A CGE-based wage-subsidy simulation from Go et al. (2009).

Findings

  • Post-apartheid inequality remained extreme and rose over 1995-2006, with no sustained downward trend. (p. 17)

    The figure shows that the Gini coefficient has been erratic – at no point has there been a downward trend lasting for longer than one year.

  • Inequality shifted from between-race to within-race, with the between-race component falling but remaining high. (p. 18)

    inter-racial income distribution has improved considerably since democracy but income distribution within groups worsened.

  • Apartheid-era inequality was already high: WIDER Gini estimates for 1959-1990, with a notable jump in 1990. (p. 8)

    Year 1959 1960 1965 1970 1975 1980 1985 1987 1990 Gini 51.70 54.00 58.13 51.00 47.00 49.00 47.00 45.00 63.00

  • Within each race group inequality rose between 1970 and 2000, most sharply among Black households. (p. 23)

    the Gini coefficient amongst Black households has moved up from 0.49 in 1970 to 0.59 in 2000.

  • Poverty reduction after 1994 came from grants rather than the labour market, with grant beneficiaries rising from 3.61 to 9.40 million (2001-2005). (p. 12)

    in general, the improved aggregate poverty situation is due to increased support from social grants, and not from the labour market.

  • Unemployment has been sustained at very high levels since the late 1990s and is not merely cyclical. (p. 26)

    The overall unemployment rate peaked in 2002 when it reached 27% but more worrying is that overall unemployment has been above 20% since the late 1990s.

  • Regression: manufacturing's share of the labour force has the largest inequality-reducing effect. (p. 54)

    a 1 percentage point increase leading to as much as a 0.37 percentage point decline in the Gini coefficient.

  • Government consumption is the only variable positively related to the Gini, which the author reads as scepticism about redistribution via spending. (p. 55)

    a higher degree of South African government involvement in the economy, through higher expenditure, seems to be positively related with a more unequal income distribution

  • The author's conclusion that unions are the dominant force behind unemployment and inequality rests on qualitative reasoning, since the model cannot measure union power. (p. 61)

    Since the empirical model cannot measure the political power of labour unions, only the number of members, a qualitative conclusion is drawn

  • Informal-sector wages are far lower than formal-sector wages, and the informal sector is small relative to the extent of unemployment. (p. 29)

    the average wage being USD 203 (R1 291) per month in 2005 as opposed to USD 715 (R4 548) per month in the formal sector.