Why South African incomes declined

(Between 1995 and 2000 everyone became poorer but the unskilled fared worst)

South Africans are worse off than they were before the end of apartheid, at least as measured by real incomes. In Incomes in South Africa Since the Fall of Apartheid, co-authors Murray Leibbrandt, James Levinsohn, and Justin McCrary document that decline and attempt to explain what has happened. They show that average incomes of South African men and women fell by about 40 per cent between 1995 and 2000, and note that there has been little improvement since then. These researchers explore income patterns in the South African economy overall and in specific groups, such as men and women, older and younger workers, and whites and blacks. Their focus is on economic well being as measured by income, rather than on other ways of evaluating social welfare, including measurement of political freedom.

The change in income is most pronounced in the lower half of the income distribution and has disproportionately affected younger workers, women, and blacks. For men in the bottom 5 per cent of the income distribution, total real income in 2000 was about half the level of 1995. In the tenth through the seventy-fifth percentile, incomes were about one third lower than in 1995. For those in the top 10 per cent, incomes declined by about one-seventh. For women, the results are very similar, although above the ninetieth percentile, women fare slightly better than men, with roughly constant real incomes. In 1995, white South African men were paid 98 per cent more than black men. By 2000, this discrepancy had grown to 118 per cent – a difference of 20 percentage points. Black and white women saw the analogous gap grow by 40 percentage points.

The decline in income may reflect a slack labour market and skill-biased technical change, the authors explain. Using a variety of statistical techniques and a range of data sources, they show that rather than a change in the "endowments" of workers, such as education and skills, it was the change in returns on these endowments that provides the underlying explanation for declining income.

South Africa's re-engagement with the world economy, after relative isolation during the period of anti-apartheid trade sanctions, may have added to the downward pressure on the incomes of lower skilled workers. Younger workers – from 18 to their early 30s – and women have suffered because of lower skill levels and less-established positions in the workforce than older workers and men.

Source: Murray Leibbrandt, James Levinsohn, and Justin McCrary Why South African Incomes Declined NBER Working Paper No.11384

For text: http://www.nber.org/digest/jan06/w11384.html

FMF Policy Bulletin/ 10 January 2006
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