South Africa remains one of the most unequal nations in the world, and recent research into the drivers of inequality has lifted the lid on pervasive issues contributing to this. The results name the vast wage gap as a major contributor. There are a few who earn millions, too many who are earning vulnerably small incomes, and many who are unemployed with no earnings at all.

The research, titled The Drivers of Inequality in South Africa, analysed the development of income inequality over the past 20 years. This was done by using household survey data from the Department of Planning, Monitoring and Evaluation’s (DPME’s) National Income Dynamics Study (NIDS), for the period 2008 to 2014/15, and data from the 1993 Project for Statistics on Living Standards and Development (PSLSD). By analysing the income dynamics of households, the research found that although inequality started to fall in democratic South Africa, there remains an urgent need for further improvement, and that some current solutions, including social grants, which are particularly helpful to the poor, are not sustainable long term.

NIDS, which follows the lives of approximately 28,000 South Africans and the people they live with over time, is the first and only national longitudinal study of its kind in the country. The study has shed much needed light on the realities of ordinary South Africans over the last decade and in so doing, is helping to inform research and policy decisions which ultimately aims to improve the lives of South Africans.

During its data collection process, NIDS makes a great effort to account for all kinds of income through various sources, namely employment (including wages); money sent from family members (i.e. remittances); social grants; or money earned from investments. Individuals earning any form of employment income, formally or informally, were counted towards the employed in this research.

In spite of these efforts to account for all types of earnings, the research found that the largest driver of income inequality came from the labour market. Put simply, South Africans still earn vastly differently. There is however some good news. Despite the income disparity between higher earners and earners on the lower end of the earning spectrum, the research also found that a majority of households receive at least some income from labour market sources. The proportion of households receiving such income has steadily increased from 60.5% in 1993 to 73% in 2014. During this period, changes in incomes from the labour market caused the Gini coefficient, a standard measure of inequality, to decrease slightly.

Looking specifically at investment income, the research further found that steep levels of inequality in investment income, which comprise of stocks, loans, rentals, private pensions, and retirement annuities, amongst others; can be attributed to the fact that wealthier households have more income to invest, and are therefore more likely to earn income in this way. However, households with excess income tend to spend rather than save and invest. Why this is the case, is an important area for future research.

Additionally, the research has made it clear that households with very low income from other sources have benefited greatly from the income they receive from social grants. Social grants are therefore a significant mitigating factor, reducing income constraints for households in financial need – a sign that this policy is achieving its desired effect. Moreover, it is also clear that without this important source of financial assistance to low income households, the level of inequality in South Africa would be much worse than what is currently observed.

Nevertheless, while social grants have been effective in combating inequality, they are not a long-term solution. The challenge ahead is to ensure economic growth that can both sustain the continued payments of social grants, as well as bring more people into employment.

Critically, the root cause of inequality – high inequality in the labour market – needs to be addressed. Many households are still relying on social grants to survive, and many more – up to 38% according to the research – use remittances to supplement their incomes. In short, this means there are not enough South Africans earning “liveable wages”.

At the policy level, there are numerous possibilities to remedy the problem of income inequality. Although long term, labour market reform, geared towards the creation of jobs on a large scale should top the list. This is no small challenge. As such, a manageable, medium-term starting point could be to encourage self-employment through policies that support the starting of small, micro and medium-sized enterprises.

Additional policy reform could involve the increased taxation of high earners, thus addressing inequality within labour market incomes and furthermore providing government with the necessary funds to aid their broader redistribution efforts.

Policy reforms that address redistribution would furthermore need to make provisions for education and vocational training as well – a qualified labour force has a higher earning potential, which in turn increases the income prospects, especially for low income earners, and drives economic growth overall.

Lastly, promoting savings behaviour and informing South Africans about the tools available to them across the financial spectrum can decrease inequality stemming from investment income.

Levels of inequality in South Africa may be improving, but not quickly enough. If we are to make lasting, positive changes, more research needs to be done using reliable high-quality data sources such as NIDS. Insights gained from the analysis of income dynamics can then be used to inform effective policy making. DM

Janina Hundenborn is a PhD candidate in the Southern Africa Labour and Development Research Unit (SALDRU) at the University of Cape Town (UCT)

The research this article is based on has been part of a collaboration between UNU-WIDER and SALDRU at UCT. Financial assistance for an earlier version has been received through the PSPPD programme, located in the DPME, and is a product of the strategic partnership between the South African government and the European Union (EU). The content of this publication can in no way be taken to reflect the views of UNU-WIDER, the DPME or the EU.