Unemployment and earnings inequality in South Africa have declined in recent years, while the trend in overall income inequality is unclear. Inequality and unemployment both remain at extremely high levels by historical and international standards. There has been a very close relationship between trends in unemployment and earnings inequality in recent years. The decomposition of earnings inequality by employment status reveals the importance of unemployment in accounting for the level and trend of earnings inequality. The distribution of employment in the formal and informal sectors is also found to be important in explaining earnings inequality, as is wage dispersion within each of these sectors. Decomposing overall income inequality by income source confirms the overwhelming importance of earnings in income inequality more generally. Inequality is only likely to be dramatically reduced through a significant expansion of decent work for the low- and semi-skilled. Simulations of an expansion of low-wage employment show that this would reduce inequality, but the effect would be limited if wages are too low. While the introduction of a minimum wage would be expected to reduce inequality, its overall effects are contingent on the extent of any associated job losses.