The effect of remittances on household income inequality in South Africa

Household incomes in developing countries often rely on a variety of sources. Analyzing the effects on income inequality of these different sources can help understand developments underlying overall inequality. South Africa’s levels of inequality have been characterized as remaining “stubbornly high”(Leibbrandt and Finn, 2012). Studies show that in the past 20 years, Gini coefficients of per capita income have increased from 0.66 in 1993 to 0.70 in 2008. Lerman and Yitzhaki (1985) derived a method to decompose inequality of income by source followed by a derivation of the Gini Coefficient by Stark et al. (1986). It therefore becomes possible to assess the impact of changes in different components on inequality of total household income. This paper utilizes these techniques to focus on the effect of remittances on inequality in South Africa. Applying the decomposition of income sources to the South African National Income and Dynamics Survey (NIDS), the paper will take the analysis one step further by constructing a counterfactual that allows to compare current inequality levels to levels that would have prevailed had migration not taken place. For the construction of this counterfactual, conditional difference in difference matching will be employed and data on matched non-remittance households will be used to predict household incomes excluding remittances for migration households. The findings of this paper show that levels of inequality are still stagnating. While inequality measured by the Gini coefficient is lacking significant improvement, the counterfactual analysis shows that without remittances, inequality would be slightly worse than current levels. The counterfactual estimation thus supports the result of the decomposition of the Gini coefficient that also finds a minor inequality reducing effect of remittances.

Grantor dc:publisher.institution

School of Economics

Year dc:date.issued

2014

Author dc:creator

• Hundenborn, Janina

Advisor dc:contributor.advisor

• Piraino, Patrizio

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/11427/12950

OAI identifier oai:identifier

oai:open.uct.ac.za:11427/12950