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Does South Africa Have the Potential and Capacity to Grow at 7 Per Cent?: A Labour Market Perspective

Author

Listed:
  • C. B. Du Toit

    () (Department of Economics, University of Pretoria)

  • Renee´ Van Eyden

    () (Department of Economics, University of Pretoria)

  • Marc Ground

    () (Department of Economics, University of Pretoria)

Abstract

Facing the challenge to adjust, the question is to what extent South African markets, specifically labour and investment markets, are flexible enough to enhance its global competitiveness, without having to revert to inward domestic protectionism. In investigating the level of flexibility in this regard, we need to determine the adjustment potential or capacity of the South African economy. However, modelling potential output and/or capacity is problematic. Building on previous research, this paper’s estimation of potential output for South Africa is based on a structural production function relationship with the maximum level of output consistent with stable inflation, supported by a full-scale macro-econometric model which is primarily supply-side driven, with capacity utilisation (or the output gap) as one of the key drivers of economic activity. The extent to which capacity is utilised in the economy is determined (defined) by the actual output (gross domestic product) relative to the potential of the economy to generate gross domestic product. Following this approach, South Africa’s potential employment needs to be determined. Does the entire labour force of working age have the potential and necessary skills to fill the available vacancies in the job market? On the contrary, our belief is that there exist certain constraints/rigidities in the labour market, which reduce the ranks of the potentially employable. In order to capture this effect, we assume that some “equilibrium or natural rate of unemployment” exists. Therefore, we presuppose a NAWRU - a natural rate of unemployment consistent with stable wage inflation. Ideally speaking, the NAWRU of an economy should be stable and not trending. However, the estimate we obtain for the NAWRU of the South African economy is increasing at a steady rate, suggesting severe structural problems in the economy, in particular, the labour market. Using this calculated NAWRU, we obtain estimates for potential output based on the structural production function approach. Our results indicate that the capacity of the South African economy is lower than conventionally expected. This reveals the essence of the impediments on the South African economy, primarily due to the sizeable constraint posed by rising labour market disequilibrium.

Suggested Citation

  • C. B. Du Toit & Renee´ Van Eyden & Marc Ground, 2006. "Does South Africa Have the Potential and Capacity to Grow at 7 Per Cent?: A Labour Market Perspective," Working Papers 200603, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:200603
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    Citations

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    Cited by:

    1. Stan du Plessis & Ben Smit & Federico Sturzenegger, 2007. "Identifying aggregate supply and demand shocks in South Africa," Working Papers 11/2007, Stellenbosch University, Department of Economics.
    2. Johannes Hermanus Kemp, 2015. "Measuring Potential Output for the South African Economy: Embedding Information About the Financial Cycle," South African Journal of Economics, Economic Society of South Africa, vol. 83(4), pages 549-568, December.

    More about this item

    Keywords

    capacity utilisation; potential output; NAWRU; macro-econometric model;

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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