Wage inequality within and between firms in South Africa

by Aroop Chatterjee & Andrew Kerr

Research on earnings inequality in South Africa has almost entirely used household survey data. This work has shown the earnings inequality is extremely high and has remained high or even increased in the post-Apartheid period. However it does not shed light on some important processes generating inequality, particularly the extent to which inequality in earnings is driven by inequality in average earnings within and between firms. In this paper we use the South African Revenue Service (SARS) tax data for South Africa, to document earnings inequality for employees, and to calculate the within and between firm contributions to overall inequality. One measure for describing earnings inequalities is the variance of the log of earnings. Song et al. (2015) made an important contribution to the study of inequality by documenting, and attempting to explain, changes in the contributions of within and between firm inequality. We follow their procedure in this paper to decompose overall earnings inequality into within and between firm components and thus to measure their relative contributions to overall earnings inequality.