Household Finance and Wealth Inequality in South Africa: Evidence from the National Income Dynamics Study Survey

Abstract

Wealth inequality remains a persistent challenge, especially in South Africa, where historical disparities continue to influence economic outcomes. Understanding household financial decision-making is crucial for addressing this issue, as these decisions significantly impact both short-term and long-term wealth accumulation. This thesis examines the roles of household balance sheet components and characteristics in wealth inequality, the relationship between asset allocation and wealth distribution, the connection be- tween diversification and wealth outcomes, and the impact of adverse life events on households that are diversified versus those that are not. Using data from the National Income Dynamics Survey (NIDS), covering approximately 11889 and 13719 households across survey waves four and five (2014 – 2017), this study employs econometric techniques, including the Recentred Influence Function (RIF) regression and the Fractional Multinomial Logit (FMLOGIT) model, to analyse wealth distribution dynamics. The findings reveal that business assets sig- nificantly contribute to wealth concentration, while real estate helps to equalise wealth distribution. More- over, higher levels of wealth are associated with increased risk tolerance and investment in moderate- and high-risk assets. A curvilinear relationship exists between wealth and asset diversification, with upper- middle-class households exhibiting the most diversified portfolios. The study also highlights that house- holds with diversified portfolios demonstrate greater resilience to financial shocks, maintaining or even increasing their net worth during adverse life events. This research makes three important contributions. First, it broadens the literature on household finance by examining South Africa, a developing economy marked by distinct structural inequalities. Second, it introduces innovative indicators of diversification and life event impacts, providing valuable insights into financial resilience. Third, it offers a comprehensive analysis of the factors influencing wealth inequality, highlighting the role of demographic factors such as education, employment, and race. The thesis findings carry important implications for policymakers, financial planners, and educators. For policymakers, the results emphasise the need to improve access to entrepreneurship opportunities and support small-business financing, especially for historically disadvantaged groups. Financial planners should create tailored savings and investment products that reflect different levels of risk tolerance and diversification needs, focusing on middle-income households that are increasingly exposed to riskier as- sets. For educators, customised financial literacy programmes should be introduced in schools and com- munity centres, with curricula developed to cover both the basics of household budgeting and more ad- vanced portfolio management skills. Collectively, these targeted measures can help reduce wealth dispar- ities, enhance household financial resilience, and promote a more equitable and inclusive economy. While the study provides valuable insights, future research should consider extending the timeframe of analysis, refining asset categorisation methodologies, and examining the long-term effects of financial shocks on household wealth.