A macro-econometric analysis of economic growth and unemployment in post-apartheid South Africa.
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This study seeks to determine whether Okun’s Law is valid for the South African economy, using time series data for the period 1994 to 2014. The data used is split into two periods, 1994q1 to 2003q4 and 2004q1 to 2014q4. Using the OLS model, it measures the extent of the relationship between unemployment and economic growth rate in South Africa, and the country’s unemployment growth elasticity. The data were accessed from the South African Reserve Bank and Stats SA. The stationarity of the variables was analysed by applying unit root tests via the Augmented Dickey-Fuller test (ADF), the Phillips-Perron (PP) test, and the Kwiatkowski–Phillips–Schmidt–Shin test (KPSS) test. The study used an ordinary least square (OLS) model in analysing the simple differenced version and dynamic version of Okun’s law, and the vector autoregressive (VAR) model to examine interdependencies between unemployment, economic growth, government consumption expenditure and adjustment to equilibrium. The Error Correction Model (ECM) was used to analyse the short-run impact of GDP growth on unemployment, as well as the speed of adjustment. The results indicate a short run and long run relationship between unemployment rate and GDP growth rate in time periods, 1994q1-2003q4 and 2004q1-2014q4, suggesting that Okun’s law is valid for the South African economy. With a 1 percent increase in GDP, unemployment can decrease by 0.13 percent, ceteris paribus. The research culminates in important policy recommendations, highlighting the relationship between unemployment and economic growth in the spirit of the National Development Plan.