Effects of inequality on total factor productivity: Exploring the technical efficiency channel in South Africa

A number of empirical studies have attempted to understand the effects of inequality on productivity through various channels such as human capital and political stability but have overlooked the efficiency linkage. This study utilises a stochastic frontier approach and a single-stage maximum likelihood estimation of a true fixed effects and true random effects model to investigate the effects of inequality on total factor productivity across the 52 districts of South Africa. The results obtained from the baseline regressions indicate that inequality has positive effects on technical inefficiency. This implies that an increase in inequality would exerts a negative effect on technical efficiency and therefore total factor productivity. In order to mitigate the negative effects, the study suggests that a mixture of pro-poor policies should be accentuated, as they might positively increase the earnings of those who are at the bottom of the distribution.