Monetary policy and wage inequality in South Africa.

The distributive consequences of monetary policy have been researched only recently and almost entirely in advanced economies. This paper sheds light on the effect of conventional monetary policy shocks on the wage distribution in South Africa, where inequality – mostly driven by the segmented labour market – remains a large issue. Impulse response functions estimated from local projections show that the wage distribution significantly worsens in response to monetary shocks. Wages in the top half of the distribution, that benefit from unanticipated expansions, are less responsive to surprise contractions, remaining protected by skill-biased technology and strong labour unions. • As most of emerging markets, South Africa features several dimensions of worker heterogeneity. • Wage inequality significantly worsens in response to unanticipated monetary expansions. • The redistributive effects are transmitted through the deeply segmented labour market. • A surprise hike boosts skilled-job wage inflation and curbs down real wages at the bottom of the distribution. • A countercyclical use of monetary policy effectively contributes to lower wage inequality. [ABSTRACT FROM AUTHOR]