Abstract: South Africa is one of the countries with the highest inequality in the world. Inequality has remained staggeringly high despite the end of the Apartheid regime in 1994. Can this persistence in inequality be accounted for by standard economic forces? We develop and quantify a model with spatially segregated residential, educational, and labor markets to study the evolution of inequality and role of the separation of South Africans in urban areas into “Townships” based on their race during Apartheid. Our setting features heterogeneous agents, incomplete markets, dynastic overlapping generations, endogenous savings, and occupational and educational choices. We leverage nationally representative household data during and post-Apartheid to establish stylized facts about inequality dynamics along various dimensions of households’ characteristics, as well as to discipline our quantitative model. We assess to which extent the model able to account for the observed evolution of inequality.

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