Determinants of Income Inequality in South Africa: A Vector Error Correction Model Approach

Abstract

The issue of income disparity has long plagued South Africa because of the political environment that existed before the country’s 1994 democratic transition. Based on the widely used Gini index, which gauges global inequality, the nation routinely has some of the highest rates of income disparity in the world. Income inequality in South Africa keeps rising even after a number of frameworks and policies have been put in place, which has a big influence on society. Thus, it is essential to comprehend the causes of income disparity and put suitable policies in place to remedy it. The purpose of this study is to look into the relationship between South Africa’s income disparity and its determinants. Using the Vector Error Correction Model (VECM) approach, this study empirically examines the effects of government spending on social grants, gross savings, population growth, and economic growth on income inequality from 1975 to 2017. Data on the Gini index are sourced from the Standardized World Income Inequality Database (SWIID). Findings reveal a statistically significant negative correlation between government spending on social grants and income inequality. Moreover, income inequality demonstrates a negative relationship with both gross savings and economic growth. However, population growth exhibits a positive correlation with income inequality. This study highlights the significance of implementing a comprehensive strategy to address income inequality in South Africa. This strategy should involve augmenting government expenditure on social grants, cultivating a savings culture within households, and enacting policies that incentivize job creation, particularly in areas with rapid population growth. In addition to making a substantial contribution to the body of evidence already available on income disparity, this study offers insightful information to policymakers working to improve the socioeconomic climate in South Africa.