The Contribution of Residential Segregation to Racial Income Gaps: Evidence from South Africa

In this paper, we contend that local segregation should be an essential component of the analyzes of the determination of socio-ethnic income gaps. For this, we adopt a thorough distribution decomposition approach, as a general preliminary descriptive step to prospective specific structural analyses. Focusing on the contemporary White/African gap in South Africa, we first complete Mincer wage equations with an Isolation index that reflects the level of segregation in the local area where individuals dwell. Second, we decompose the income gap distribution into detailed composition and structure components. Third, we explore the heterogeneity of segregation effects on wage gaps along three theoretical lines: racial preferences, labor market segmentation, and networks links. Segregation is found to be the main contributor of the structure effect, ahead of education and experience, and to make a sizable contribution to the composition effect. Moreover, segregation is harmful at the bottom of the African income distribution, notably in relation to local informal job-search networks, while it is beneficial at the top of the White income distribution. Only minor influences of racial preferences and labor market segmentation are found. Specific subpopulations are identified that suffer and benefit most from segregation, including for the former, little educated workers in agriculture and mining, often female, immersed in their personal networks. Finally, minimum wage policies are found likely to attenuate most segregation's noxious mechanisms.