Wage inequality under inflation-targeting in South Africa

This paper aims at providing new evidence over the effect of conventional monetary policy shocks on wage inequality through the earnings heterogeneity channel under the inflation-targeting regime implemented in South Africa since 2000. The empirical contribution follows previous studies by implementing a multivariate time-series analysis and identifying the structural shocks in a vector error correction model. Impulse response functions show that the overall wage distribution worsens immediately after a positive shock to the prime rate. The effect is found to be symmetric such that expansionary shocks have similar, although opposite, consequences on wage allocation. Redistribution appears to be driven by the weakest sectors of the economy, given that the most sizeable industries experience no significant or clear-cut variation in the aftermath of a monetary shock. Interestingly, the top half of the distribution always narrow relative to the bottom indicating that better-paid jobs, which are concentrated among the white population, remain secure in bad times and benefit the most in good ones. By the same token, the black–white wage gap consistently widens after any kind of monetary shock.