Unemployment and earnings inequality have moved closely together in South Africa in recent
years, suggesting that there may not be a trade-off between them as the literature generally
suggests. This article explores the relationship between unemployment and earnings inequality in
South Africa, specifically investigating the extent to which changes in unemployment can
account for changes in earnings inequality. Decomposing overall income inequality by factor
source shows the overwhelming importance of earnings in income inequality more generally.
Decomposing earnings inequality by employment status reveals the centrality of unemployment
in accounting for the level and trend of earnings inequality. The distribution of employment in
the formal and informal sectors is found to be of lesser importance in explaining earnings
inequality, as is wage dispersion within each of these categories. The findings point to the critical
importance of reducing unemployment in South Africa if the extremely high levels of inequality
are to be addressed.