Evaluating the determinants of income inequality in South Africa: An ARDL approach

Abstract

This paper aims to build on previous studies and investigate the determinants of income inequality in South Africa with a special focus on the role of inflation. The study examines various variables capturing demographic, structural, economic, and political factors that are deemed to be triggering or reducing income inequality, according to previous literature. In the empirical investigation, the study employs the autoregressive distributed lag (ARDL) approach to cointegration and examines both the short-run and long-run determinants of income inequality in South Africa. The findings reveal that inflation has an aggravating effect on income inequality in the short run and no effect in the long run. In comparison, democracy, government expenditure, bank-based financial development and female labor participation have a significant short-run impact on income inequality, though the magnitude and signs of these variables differ. Based on the findings, this study recommends that efforts to increase the availability and accessibility of credit to the private sector could be promoted by policymakers in South Africa while ensuring that credit extension does not trigger inflation, as it did during the period before 1990. In this view, strategic interventions from various stakeholders, such as the government, the banking sector, local communities, and private entities, could provide finance for development in a manner that would mitigate the gaps arising from unequal opportunities in South Africa.