Decomposing the impact of human capital on household income inequality in South Africa: Is education a useful measure?

ABSTRACT

Human capital (HC) has increasingly been identified as a driver of economic development, with the potential to reduce income inequality, which, in South Africa, originates in the labour market. HC is, however, a complex concept to measure. This study uses Fields’ regression-based decomposition method to analyse the relationships between income inequality and HC in South Africa. The Fields method allows for the analysis of the impact of several factors contributing to HC on the distribution of a measure of income. Data from the National Income Dynamics Study (NIDS) wave 1 (2008) and 5 (2017) are used. The findings suggest that increasing educational attainment, through improved school quality for all, would likely play a key role in reducing income inequality in South Africa. Furthermore, the large role of education attainment in explaining household income inequality supports the use of education attainment as a proxy for HC in South Africa.

KEYWORDS:

• Human capital
• education
• inequality

Acknowledgement

Tamaryn Jean Friderichs. June 2021. Human Capital in The Context of High Levels of Inequality in South Africa. Doctoral Dissertation, Rhodes University. This article started out as one of the chapters in the thesis however all the adjustment made to the paper through the publishing process has resulted in a article which has a different focus. It does however stem from the thesis.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Wealth (also known as ‘net worth’) is calculated as the difference between the market value of all assets and liabilities (Orthofer, 2017).

2 African, Coloured, Asian and Indian ethnic groups are classified as Black in accordance with the Broad-Based Black Economic Empowerment (B-BBEE) Act 53 of 2003.

3 Hall et al. (2018) classify ‘extended’ households as multi-generational or consisting of extended related family members living in one home.

4 The age 25 is used as the expected age at which education attainment is completed (see UNDP, 2020). The age 65 was used as the upper limit given the South African retirement age is between 60 and 65.

5 The results are estimated below for the model with household size included as an explanatory variable given household size has been noted as a contributing factor to income inequality (Ayyash & Sek, 2020). The model was however also estimated without household size given that it is influenced by education and therefore captures some of the variance caused by education – the differences in the results were negligible and the estimated partial regression coefficients were not statistically significant.

6 The Gini coefficients are measured for household equivalised income which are expected to be lower than household income per capita Gini coefficients.