Economist explains why whites earn more

Johannesburg - White people earning six times more than blacks, screamed the headlines after the release of the 2011 census.

I do not doubt that whites earn more than blacks - although in a way it is too simplistic to state it as such.

The 2011 census provides several reasons why white households earn six times more than black households.

One can explore the reason in two parts. Firstly on an individual basis, where whites earn on average about four times more than their fellow black South Africans. The second part has to do with household dynamics and why it is that white households – again on average – earn six times more than black households do.
 
On the individual factors, the following points make a big difference:

Firstly, the median age of whites in the latest census is 38 years compared with 33 years in 1996. Black people’s median age is still 21 years. All population groups grew older, except black people.

This fact makes a big difference. Everywhere in the world, unemployment among young people has increased. Add to this that the longer you work, the more you earn.

Even the civil service gives ample examples of people who had been working for 15 or 17 years who earn up to three or four times more than beginners. Typically, you would at least have received a promotion or two if you're 38 years old - something you're probably not entitled to at age 21.

Based on the age difference, one would expect the typical 38-year-old to earn about 50% to 100% more than the typical 21-year-old.



Taking into account the young median age for blacks, they have thus in the past decade made considerable progress in catching up on salaries. However, there are many other reasons that can explain the income differences at the individual level.

One is the education dividend white people receive. More than 77% of whites have matric or a higher qualification, compared to just 35% of blacks, according to the 2011 census.

Education and skills besides age have probably the biggest role to play here. If one population group has more skills than another, there will be a significant income difference. Years ago, the Organisation for Economic Cooperation and Development (OECD) stated it very simply in a report: "Learn more, earn more."

Based on training alone, one would expect a typical white person to earn about twice as much as a typical black person.

According to the OECD report, people in developing countries with a tertiary education earn 62% more than people who have just finished school.

In South Africa the difference between a grade 11 and a grade 12 salary is about 100%, regardless of race. People with master’s degrees and higher earn 6.5 more than someone with only a matric, and about 13 times more than someone with grade 11.

This remains the largest and longest lasting impact of apartheid. In addition, the current school system is possibly even more devastating.



Thirdly, white people prefer very different degrees and skills to blacks. For example, more Indians and whites choose to qualify as chartered accountants, and many more of them study engineering as a percentage of their population group than others.

Fourthly, compared with fewer than 54% of black people, more than 73% of white people are part of the labour force. These figures include unemployed people and represent everyone who works or wants to work. It stands to reason that a person must first work or at least want to work before he can earn.

Fifthly, 9% of whites in work have their own business, compared with just 3% of blacks. The median employer earns about 2.5 times more than the typical employee. About 60% of all employers with more than 20 workers in South Africa are white people who have built their own private sector company.

This also plays a role in the average earnings, because the typical white employer employs more people to help him make more money.

A sixth factor is that typical white people stay about 71 months with the same employer, compared with 51 months for blacks. Experience can therefore also play a role in the earnings of racial groups.



Then there are also differences at household level, which influence the averages that groups earn.

About 24% of white households have a woman as head which typically represents a single parent, while 43% of black households live in such a setting. More white households thus stay together and thus have a greater likelihood of two incomes.

Although not specifically asked like that in the latest census, it may also be that some households have a member working outside the country's borders and these households would more likely be white.

The UK reports that 115 000 South African-born people work there, and there have been reports of over 100 000 South African working in sub-Saharan Africa as expats - often alone, and more often than not part of the minority groups in South Africa.

This also makes the "single parent factor” look a little different for minorities in general, and probably whites in particular.

About 12% of South African households have at least one parent, and that's probably a bigger factor among black households than white households.

Furthermore, more black households live in rural areas, which also make a very big difference in the earnings of a household.

Like most other countries in the world, rural households earn less and in South Africa most unemployment is in rural areas. This can certainly be partially blamed on apartheid, but maybe not wholly because people and households can now move freely.

It is thus not mostly discrimination which determines that black households earn only a sixth of white ones. There are logical factors such as age, education, entrepreneurship and households' relationships and values that play a crucial role.

Perhaps people should stop looking simplistically at figures.

I have also discussed this with the head of Statistics South Africa, and he mostly agreed.

Thus, the press release of the latest census was misleading in that headlines created an impression that race is the determining factor when there are clearly other factors which play a bigger role.

 - Fin24

*Mike Schüssler is an economist at economists.co.za and has won Sake24's Economist of the Year competition twice.




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