Our website has detected that you are using an outdated browser that will prevent you
from accessing
certain features. An upgrade is recommended to improve you browsing experience.
Wage inequality under inflation-targeting in South Africa
Published Date:
2021-09-02
Author:
Serena Merrino
Last Modified Date:
2021-12-08, 10:21 AM
Category:
Publications > Working Papers | What's New
This paper provides new evidence of the effect of conventional monetary policy shocks on wage inequality through the earnings heterogeneity channel under the inflation-targeting regime that has been in place in South Africa since 2000. The empirical contribution follows previous studies by implementing a multivariate time-series analysis and identifying the structural shocks, as in Romer and Romer (2004). Impulse response functions, estimated from linear and non-linear local projections, show that the overall wage distribution temporarily worsens in response to unanticipated monetary contractions because of a widening gap between the two most extreme deciles. Wages in the top half of the wage distribution are less responsive to contractionary shocks, remaining protected by skill-biased technology and strong labour unions. The effect on inequality is temporary, however, declining after one year. Policy effects are also asymmetric, with very small reactions to accommodative shocks. Over the longer term and during expansionary phases of the business cycle, monetary tightening significantly and persistently reduces all metrics of inequality. This suggests that countercyclical use of monetary policy effectively contributes to lower wage inequality.