This paper develops a new multilateral decomposition procedure for the analysis of wage
differentials and applies this to the racial wage hierarchy in the South African labour
market. Using microdata on male workers from the 1994 October Household survey, it is
found that whites received the highest wages followed by asians, then coloureds and
finally blacks. Productivity differences are shown to explain approximately two thirds of
the white and black wage differentials, with the unexplained residuals attributable to
discriminatory overpayment of whites and underpayment of blacks, and virtually all of the
asian and coloured differentials. The results provide the basis for a discussion of postapartheid
policy initiatives to tackle racial inequalities in the labour market.