Fiscal policy, labour market, and inequality: Diagnosing South Africa’s anomalies in the shadow of racial discrimination

Inequality in South Africa is the enduring legacy of racial discrimination. We use a dynamic perspective to show the linkages between persistent effects of discrimination in the labour market and the efficacy of redistributive fiscal policy in reducing inequality. We present a machine-learning analysis based on household survey data in the Post-Apartheid Labour Market Series to predict the main drivers of the relationship between workers’ heterogeneous socioeconomic characteristics, the behaviour of variables related to labour market status, and labour income inequality. The empirical investigation covers the period 2000–17. Drawing on this preliminary evidence, we build a dynamic stochastic general equilibrium model with a dual labour market and job search frictions that represents the structural features of South Africa’s economy, which can be used to assess the effects of fiscal policy on inequality in the postapartheid period and to simulate the effects of alternative fiscal measures and labour market reforms.