The Relationship Between Unemployment and Economic Growth in South Africa: VAR Analysis

This article aims to study real GDP, inflation rate, exchange rate and their impacts on the unemployment rate in South Africa by considering the annual time-series data covering the period 1980-2018. The findings of the Johansen approach to co-integration concluded that there was no evidence of a long-run connection among the variables. The findings of Granger causality reported that there was bidirectional causality between the pairs of real GDP vs. unemployment rate, exchange rate vs. unemployment rate, and inflation rate vs. unemployment rate; however, a unidirectional causality was found in the pairs of real GDP vs. exchange rate and inflation rate vs. exchange rate. The findings of impulse-responses demonstrated that there was a negative significant response of the exchange rate to the unemployment rate in the long-run; conversely, the response of real GDP to the unemployment rate was positive significant in the long-run. Furthermore, the findings of variance decompositions reported that all regressors strongly predict the unemployment rate both in the short and long-run. The study suggested that the government should provide job-readiness skills, business awareness, technological knowledge, and training programs to its population to ascertain unemployment reduction. The study also suggested that the South African government should create a supportive environment and flexible labor market policies that attract small businesses and private-sector investment which ultimately strengthen the entrepreneurial activity with new entrepreneurial actors in order to create job opportunities and absorb a large pool of unemployed youth.