HLEG thematic workshop on Measurement of Well Being and Development in Africa, 12-14 November 2015, Durban, South Africa, More information at: www.oecd.org/statistics/measuring-economic-social-progress

1. Measurement issues and the central role
of the labour market in South African
income inequality
Servaas van der Berg
Research on Socio-Economics Policy (ReSEP)
University of Stellenbosch
Conference on Measurement of Well Being and Development in Africa
Durban, 13 November 2015
This presentation is in part based on joint work with Debra Shepherd, funded by REDI

2. Inaccuracy in inequality measures
•Teachers’ actual earnings about 40% higher than reported
(Armstrong 2014, Woolard et al.)
• Similar numbers appear to apply in other sectors
•Wages reported in SAPED (firm-level datasets) “consistently
around 2 and 1.5 times greater than wages in the PALMS series
for managers and production workers respectively” (Rankin &
Kreuser)
•Many households in SA split across two locations – thus
reported inequality is exaggerated
• Also conventional to include remittances received (incl. in kind) with
consumption of receiving household, but it is seldom subtracted
from that of sending household

3. Gini-coefficients vary by data source & measurement…
0.55
0.60
0.65
0.70
0.75
0.80
0.85
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
IES - Income (STC) IES - Expenditure (STC) IES - Income (COICOP) IES - Consumption (COICOP)
AMPS - Income Census - Income (No imputations) Census - Income (SRMI1) Census - Income (SRMI2)
NIS - Income NIDS - Expenditure PSLSD - Income PSLSD - Expenditure
OHS - Income (No imputations) OHS/LFS - Expenditure (No imputations) GHS - Expenditure (No imputations) OHS - Income (SRMI2)
OHS/LFS - Expenditure (SRMI2) GHS - Expenditure (SRMI2)

4. The case for measuring inclusion
• If money-metric inequality is mismeasured, it strengthens the case for
greater focus on measuring poverty – which is less affected by
mismeasurement at the top end of the distribution (e.g. dividend &
property income)
• A broader measure of inclusion could also be used, which includes a
poverty measure along with some measure of relative deprivation
• Alternatively, for reason discussed below, the focus in inequality
measurement could fall on labour market inequality
• Central to labour market inequality is inequality of opportunity,
exemplified in vastly unequal education

5. South Africa’s twin convexities
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Logofwageperhour
(conditional)
Education (years)
Log of wage, 2005
(conditional)
• Labour market (Mincerian
returns to education) – a
strong and convex positive
relationship
• School system (social
gradient) – a strong and
convex positive relationship

6. Convex SA Returns to Education
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Logofwageperhour
(conditional)
Education (years)
• Skills shortage at top end
generates a wage premium:
• A graduate earns 3½ times as much
as a matriculant (conditional upon race,
gender, experience)
• Oversupply of unskilled
depresses their wages
• Skills premium and distribution
of educational attainment
central to SA income inequality

7. Wage inequality & income distribution
•Wage distribution statistically “explains” ±80% of income
inequality between households (ignoring household size)
•2/3 of household wage earnings inequality due to
•inequality in wage levels
rather than
•fraction of household members working
(Leibbrandt et al. 2009)

8. • Decline pervasive (16 of 18 countries) - larger than rises in 1990s
• Important contribution to poverty decline & rise of middle-class
• Gini fell from average 0.550 in early 2000s to 0.496 around 2012, an average
decline of 0.86% per year
Source: Lustig 2014
Latin America inequality declining in 2000’s
8

9. Wage inequality & income distribution
Gini for wages amongst employed steady at ± 0.60
Other factors that could affect distribution:
• Household size – worsens Gini
• Household composition – worsens Gini
• Unemployment – worsens Gini
• Dividends, property income – worsen Gini
• Transfers – slightly improve Gini (reduces poverty more)
Thus wage inequality sets a floor below the Gini
Income distribution unlikely to improve substantially before wage inequality is reduced,
through:
• Changes in educational attainment and quality
• Changes in returns to education

10. PARADOX OF PROGRESS
• More education can initially increase Gini, given convex returns to
education
• Microsimulation (following Gasparini et al 2005, Bourgiugnon et al
2005), changing education whilst holdings other earnings
determinants constant, shows that
• expanded education may have moderately increased Gini for wages
• by 0.015 in 1994-2000, and
• by .009 in 2001-2011

11. Returns to Education 1994 – 2011
Source: Own
calculations using
PALMS. Returns to
education normalised
to 0 for persons with
highest completed
education = Gr8. Wage
regressions include
controls for gender,
race and age
(quadratic).

12. Returns to education by birth cohort
0.00
0.50
1.00
1.50
2.00
2.50
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Returnstoeducation
Years of education
1945
1950
1960
1970
1975
1985
Own calculations using PALMS. Returns to education normalised to 0 for person with no formal schooling. Wage regression
estimated on pooled dataset (1994-2011) with log(wage) as dependent variable; time, age (quadratic) and birth cohort effects
included as controls. Returns to education are calculated as the coefficients on interactions between birth cohort effects and

13. Conclusion
• Labour market inequality is central to overall inequality and to
poverty
• Central to equity in the labour market, to poverty reduction and to
income distribution is educational quality
• though there are long lags involved
• Thus both labour market and overall income inequality cannot be
reduced fast
• The paradox of progress means that initial educational gains may even
increase inequality
• But without improved educational quality, overall income
inequality cannot fall much below its current floor
• Educational quality for all is thus the central national equity
concern