An econometric analysis of the relationship between economic growth and employment in South Africa

Abstract

The main purpose of the study was to investigate whether or not there is a relationship between economic growth and employment in South Africa using quarterly data from 2008Q1 to 2016Q4. The high unemployment in South Africa has long been observed and both suggestions and questions have been raised on how to reduce it. One of the factors that has been perceived as capable of reducing unemployment is economic growth. The current study therefore tackled whether or not economic growth had a significant impact in boosting employment. The study investigated the long and short run relationship between the two variables. Employing the Phillips-Ouliaris test for cointegration, the study found that the null hypothesis that stated that the two series were not cointegrated was not rejected at 5% level of significance. This indicated that the two series did not reveal significant connections in the long run and thus could not impact upon one another in the long run. To investigate the short run relationship between the two series, the study employed VAR model and found that economic growth influenced employment. Granger Causality confirmed this and established that the direction of causality ran from economic growth to employment and not vice versa. Impulse response function was also used to investigate how the variables may perform in future due to some external shocks. Of interest, the study found that shocks to GDP had more positive significant influence when compared to shocks in employment. The study found that shocks in employment had a more negative impact on GDP. Holt Winters nonseasonal forecasting produced forecasts for both of the series for 10 quarters. The results revealed that both of the series show steady increases in the forecast. The study concludes by providing recommendations to the government to intensify current policies. Furthermore, the study suggests that the government needs to consider other possible factors that contribute to the high levels of unemployment. For instance, structural unemployment was identified to be the main type of unemployment in the country and policies aimed at reducing it may help in boosting employment. In addition, the current study may serve as a guide for novice researchers and also contribute to the body of knowledge on the topic. Also, the study partially answered the question of whether or not economic growth is a significant factor in promoting employment. The findings could influence the government in making informed decisions and planning accordingly.