HAROON BHORAT: SA’s missing middle
To address SA’s inequality, we need to understand the roots of our wage disparity. The problem lies right in the middle – not at the bottom or top
It is common cause that income inequality in SA is among the highest in the world. Since 1994, there have been various economic and political reforms to address this and to redistribute economic power. Examples include a progressive tax system, social grants for the poor and employment equity legislation.
However, in the 25 years since the end of apartheid, inequality has not only remained stubbornly high, but has increased significantly. SA’s Gini co-efficient — a measure of inequality where a higher number denotes a greater level of inequality — increased from 59.3 in 1993 to 63 in 2014. This is unlike other developing countries with similar problems. In Brazil, a common comparator with SA, the Gini was 63.3 in 1989, but it had dropped to 51.3 by 2015.
So why weren’t we able to push back at inequality the way Brazil did? The answer lies mainly in the labour market. By far the most prominent driver of income inequality in SA is wage inequality.
Ranking wages from the lowest to the highest percentile shows an interesting pattern. Growth in wages at the bottom end has hovered around 2% a year on average. In the mid-tier, from the 30th to the 70th percentile, this decreased to less than 1% real wage growth on average. Right in the middle, workers saw growth of 0% or even negative growth. After about the 70th percentile, wage growth increased steeply until the top, reaching a growth rate of almost 3% in the highest decile.
This is a clear illustration of the "missing middle". Indeed, this is a new phenomenon in SA: amid rising income inequality, it is actually individuals in the middle whose earnings were eroded.
So, who falls into the middle of the distribution? These are mainly contract cleaning staff, drivers, protective services workers, labourers in manufacturing, assembly and mining, as well as retail and hospitality staff.
How have they been let down so badly by the post-apartheid labour market?
This missing middle in wage distribution is the new form of inequality in SA
There are a few explanations. At the bottom, the rise is the result of minimum wages for lower-skilled workers. Without minimum wages, the bottom of the curve would look like the middle, if not worse.
Changes in the middle and the top are due to three factors: higher education, technology and structural changes in the sectoral shares of SA’s GDP.
Since democracy, the supply of workers with a matric has increased, while the quality of this qualification has decreased, undermining its value. The result is that higher education — far more trustworthy than matric — has been rewarded with rising wages. And better-educated workers are at the top end of the distribution.
Simultaneously, the SA economy has transformed from one dependent on resources and manufacturing to one in which the largest and fastest-growing sectors are business finance and services.
As SA opened its borders to international trade in the 1990s, we struggled to compete with cheaper imports and our manufacturing sector was decimated. But advances in technology replaced the tasks of workers in the middle and bottom of the distribution, while enhancing and rewarding those at the top.
Masses with a matric
The result is that the labour market has been flooded with matric- educated workers who not only have to compete with each other, but also with a market crowded by imports.
So, it is not surprising that the jobs we find in the middle of the distribution are often nonroutine and manual — unskilled or semi-skilled work that isn’t easily automated. It’s not easy to replace a truck driver, for example.
But the changes played into the hands of those at the top: growth in finance and services married well with increasing returns to higher education, and complemented technological advancements.
This missing middle in wage distribution is the new form of inequality in the country. It is representative of a failed schooling system, a sectoral growth path not creating enough medium-skilled jobs, and one that remains threatened by the onset of the fourth industrial revolution.
Engendering a growth strategy that creates a large number of jobs for workers in the middle of the distribution through, for example, labour-intensive manufacturing, remains at the heart of SA’s long-run economic development challenge.
• Bhorat is professor of economics and director at the Development Policy Research Unit at the University of Cape Town