Wages and Wage Inequality in South Africa 1994–2011: Part 1 – Wage Measurement and Trends

• DOI: http://doi.org/10.1111/saje.12148
• Date: 01 June 2017
• Author: Martin Wittenberg
• Published date: 01 June 2017

WAGES AND WAGE INEQUALITY IN SOUTH AFRICA

1994–2011: PART 1 – WAGE MEASUREMENT AND TRENDS

MARTIN WITTENBERG*

Abstract

We analyse the long-term trends in wage inequality in South Africa, using household survey

data. We show that the trends in household income inequality are largely driven by changes in

wage inequality. Given the detailed nature of our series we show that measurement issues and

breaks in the series need to be dealt with in order to draw robust conclusions from the data.

Most standard inequality measures show that wage inequality has increased over the period.

Nevertheless the choice of measure matters, because there are different trends in different parts of

the distribution. It appears that the distribution below the median has become more compressed,

while the top of the wage distribution has moved away from the median. The inequality in the

labour market translates into even higher inequality in society given that high earners tend to live

together with other high earners while low wage individuals often end up sharing their incomes

with the unemployed. Furthermore there are many South Africans with access to no wage

income. Given the trends analysed here it is not surprising that overall inequality in South Africa

has not come down or has even increased since the end of apartheid.

JEL Classification: C13, C42, J31

Keywords: wages, income brackets, missing data, multiple imputations, outlier detection

1. INTRODUCTION

Inequality is again on the centre-stage in the international debate, with the run-away suc-

cess of Piketty’s book “Capital in the Twenty-First Century” (Piketty, 2014). In many

countries in the world inequality has widened over the last few decades, with gains dis-

proportionately concentrated at the top end of the income distribution. This may be due

to the weakening of redistributive policies in many OECD countries: tax rates on top

earners and on corporations have come down, while union power has significantly weak-

ened across the board.

* Corresponding author: DataFirst, SALDRU and School of Economics, University of Cape

Town. E-mail: martin.wittenberg@uct.ac.za

This paper draws on and extends work reported on in two working papers, Wittenberg and

Pirouz (2013) and Wittenberg (2014). Some of the original data work was done with the sup-

port of an infrastructure grant to DataFirst from the Redi3x3 project on “Employment/

Unemployment, Income Distribution and Inclusive Growth.” The Vice-Chancellor’s Strategic

Fund of the University of Cape Town paid for the initial construction of the PALMS dataset

without which this research would not have been possible. The ILO commissioned some of

the initial analyses of wage trends, which are reported in Wittenberg (2014). I would like to

acknowledge the helpful comments and support from Patrick Belser and Kristen Sobeck in

that work. I would also like to thank the editor of the SAJE Steven Koch as well as two anon-

ymous referees for helpful comments.

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of Economics

South Africa is in some respects an anomaly: the government that came into power in

1994 was explicitly committed to redistribution and was in alliance with the trade union

movement. Unlike in many other countries, union influence was actually extended

through the labour relations system during this period. Nonetheless, as we will show

later, inequality in labour earnings still widened during this period.

The South African case is therefore of considerable interest more generally. Indeed

Piketty opens his analysis (2014, p. 39) with the Marikana massacre. That conflict was

sparked by the suspicion that the bosses were benefitting more from growth than the

workers, i.e. the impression of widening inequality is itself becoming a cause of labour

instability.

Understanding wage trends in South Africa post-1994 is therefore important: it is

interesting to South Africans in its own right, because the question of the distribution of

the benefits of growth is central to the political debate; and it might illuminate the proc-

esses underpinning the growth of inequality more generally. Bhorat et al. (2001),

Leibbrandt et al. (2010) and Leibbrandt et al. (2012) have argued that labour ma rket

inequality is a key component of overall South African inequality, accounting for around

85–91% of total income inequality.

Analysing wage trends should be fairly straightforward, given that South Africa has

been collecting survey data on earnings since at least 1994. Nevertheless this has not

been a focus of research recently. Indeed, as noted in Wittenberg and Pirouz (2013), the

series is bedevilled by breaks in the measurement process. So one of the more significant

general lessons to emerge from South Africa is the importance of careful measurement

for the analysis of inequality.

In this paper we will present the first systematic look at the long-run trends, deal-

ing with as many of the measurement issues as possible. In the process we will argue

thatconfrontingthemisnotaminorcomponentoftheresearch:itisabsolutelycen-

tral if one wishes to get the trends right. This paper is the first in a two article series.

Here we consider the measurement of wages and wage trends, while we turn the

attention to the measurement of inequality in the accompanying paper (Wittenberg,

in press).

The plan of the discussion for this paper is as follows: in the next section we

review the literature. We then talk about the data underpinning our study and focus

on three key measurement issues: changes in the instrument, outliers and missing

data (including bracket responses). We show why these issues matter. In section 4 we

discuss the methods for analysing the data. In particular we discuss the algorithms

for detecting outliers and multiple imputations. In section 5 we show the impact of

different types of data quality adjustments on mean wages, percentiles of the wage

distribution, and Gini coefficients. In the final section we discuss wage trends and

the evolution of wage inequality. We show that real wages have risen over the 1994

to 2011 period, but that the mean has pulled away from the median, leading to a

noticeable rise in overall wage inequality.

2. LITERATURE REVIEW

The earnings information in South African household surveys has been used to many

ends: to estimate discrimination (e.g. Rospabe, 2002), investigate the union wage pre-

mium (e.g. Schultz and Mwabu, 1998; Butcher and Rouse, 2001), or to estimate returns

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