Economic Growth - Unemployment Nexus in South Africa: VECM Approach

Abstract

This study analyses unemployment – economic growth relationships and tests for any long-run relationship for the period 1967Q1 to 2013Q4. Due to the dynamic nature of the inter-relationships, the error correction is performed in order to find the speed at which growth of gdp adjusts to shocks in employment/unemployment in South Africa. The quality properties of data used reveal that such data does not contain correlation and hence the variables are integrated of order zero. The Johansen cointegration test revealed about four cointegrating vectors, while the model identification showed the South African growth model can be uniquely identified. This was done by imposing restrictions on the estimated coefficients. The vector error correction (VECM) method was used to test for short-run dynamics and the results showed that about 62 percent of economic growth is corrected each quarter. These overall results show that there is a negative relationship between economic growth and unemployment in South Africa.

DOI: 10.5901/mjss.2014.v5n20p79