Why Has Decreasing Schooling Inequality Not Led to Decreasing Earnings Inequality in South Africa?

David Lam, University of Michigan
Murray Leibbrandt, University of Cape Town
Arden Finn, The World Bank
Nicola Branson, University of Cape Town

Inequality in education has declined substantially in South Africa since the end of apartheid. Inequality in years of completed schooling has declined by all standard measures of inequality. At the same time, inequality in earnings has not shown significant declines, and may have increased. Given the strong positive relationship between earnings and years of schooling, why hasn’t the decline in schooling inequality led to declines in earnings inequality? This paper explores this puzzle from both a theoretical and empirical perspective. We look at the theoretical relationship between schooling inequality and earnings inequality when earnings are a convex function of schooling. We look at how earnings inequality is affected by changes in returns to schooling when returns increase at some levels of schooling and decrease at other levels. We show that changes in the distribution of schooling would have led to significant declines in earnings inequality in and of themselves. Changes in the returns to schooling, however, especially rising returns at the top of the schooling distribution, have offset the equalizing changes in the schooling distribution. The net result is a combination of decreasing schooling inequality and persistently high earnings inequality.

Keywords: Human Capital, Education, and Work, Inequality, Disadvantage and Discrimination, Econometrics , Economic Demography

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