1 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite Terry Mckinley Rafael G. Os ó rio IPC-Bras í lia July 17 th, 2006

2 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Motivation Why study inequality in South Africa? Our paper studies the evolution of earnings inequality in SA combining different sources of data covering Why earnings? In SA earnings inequality was responsible for around 70% of the total income inequality in 2000 and also because of the availabilty of the data.

3 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Contribution SA has a large literature on poverty and inequality focusing on 1995 and Because earnings is the largest component of income inequality, if we understand its determinants, we can have a clearer picture of the evolution of SA inequality over a 10 year period: We can also apply static and dynamic decomposition techniques in order to identify how structural changes in SA might have affected inequality.

4 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Main results

5 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Main results Such trend is a hopeful sign but whether it will continue or not depends on the dynamics of factors driving inequality. Earnings inequality has risen or remains high across various categories of workers, particularly based on Race, Education or Rural/Urban differentiations. Demographic changes in the size of sub-groups are functioning to reduce inequality. However, the income gap across sub-groups is increasing. Occupational changes emerge as an influential factor driving inequalities.

6 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Data Sources Household surveys collected by STATS SA. OHS for LFS for IES for 1995 and 2000 in order to link our study with the literature. Many challenges because we are merging different surveys with different concepts and definitions.

7 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Inequality Measures Gini: Most popular – Income Gap between 2 individuals randomly selected from the population GE(  ): Satisfy all desirable axioms of inequality High values of  implies more weight on the top of the distribution. GE(0): Theil-L * GE(1): Theil-T GE(2): Half of the square of CV

8 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Trends in Household Income Inequality ? 4.0% 8.0% 3.9%

9 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio

10 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Trends in Household Income Inequality A. Labour Market Changes Facts: Increased movement of people previously classified as inactive to the labor market, mainly African women and former agricultural workers (small farmers). Rural migration towards urban areas. Skill biased labor market due to liberalization of SA trade and increased openness to foreign investment (Priority of the Government ’ s strategy). Recent literature, Milanovic (2005b), shows evidence that at the beginning of trade liberalization in developing countries, high-income households have been the main beneficiaries, not low-income or middle-income households. Labor market changes can intensify between-group inequality. Increase polarization.

11 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio

12 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio

13 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Trends in Earnings Inequality A. Effect of Unemployment

14 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Trends in Earnings Inequality B. Job creation

15 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Trends in Earnings Inequality

16 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Evolution of Earnings Inequality

17 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Evolution of Earnings Inequality

18 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Converging Towards and Diverging away from the mean

19 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio

20 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Dynamic Decomposition FLL(2006) shows that the Rb term can be also decomposable into 3 categories using a dynamic decomposition based on Mookherje and Shorrocks (1982) and Jenkins (1995): a) within inequality part b) allocation effect: within inequality constant but not shares c) allocation effect: relative means constant but not shares d) income effect: captures changes in mean income across sub-groups.

21 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio

22 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Macroeconomic Trends Government Policies: focusing on macroeconomic stability and exports in order to promote growth; making labour markets more flexible; improving productivity; increasing training and employment for unskilled and low- skilled workers; increasing the proportion of non-whites and females at all levels of employment; providing a right to annual leave; and imposing rules and procedures that prevent unfair dismissal.

23 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio According to the prevailing literature: Policies have failed to generate growth rapid enough and employment-intensive enough to counteract rising unemployment However, most of these judgments are based on evaluating trends only up to Human development outcomes have been more encouraging due to more equitably distributed fiscal expenditures and the expansion of access to public services.

24 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio

25 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Correlation with Macroeconomics factors Inflation was negatively correlated with inequality but not statistically significant. The correlation of the Gini coefficient of earnings with the Unemployment rate is positive (0.708) and significant (0.02 p- value). Contrary to expectations, Growth has also been associated with rising inequality. When we hold unemployment constant, we find that rising inequality is associated with a fall in average earnings ( sig at 10%).

26 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Conclusion SA earnings inequality rose sharply initially until 1999/2000 and then fell marginally. Such a trend is a hopeful sign but whether it will continue or not depends on the dynamics of factors driving inequality. Rising unemployment was the principal immediate factor. Higher rates of participation of Africans, rural residents and women pushed wages down, increasing inequality (rising labour supply increasing bargain power of employers).

27 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Conclusion Export-led growth strategy has benefited higher income workers who possess education and skills. Decline in inequality will continue? Earnings of higher-income workers are decreasing relative to mean earnings. But lower-income workers are also losing in relative terms. Employment Status has emerged as an influential factor in driving earnings inequality, especially during the 2000s. On a sectoral basis, agriculture has declined in importance and services have risen. Also a higher level of formalisation for employees.

28 Earnings Inequality in South Africa since the End of Apartheid Phillippe G. Leite, Terry McKinley and Rafael G. Os ó rio Conclusion Earnings inequality has risen or remains because of sharp differentials across various categories of workers, particularly based on Race, Education or Rural/Urban differentiations. Demographic changes in the size of such groups are functioning to reduce inequality. However, the income gap across sub-groups is increasing. Occupational changes emerge as an influential factor driving inequalities. Earnings inequality likely to remain high as long as unemployment is high. Will increased openness generate widespread employment and rising earnings for low-skill workers?