Vincent Dadam

This paper investigates hysteresis in South Africa’s unemployment. First, we test the presence of hysteresis in unemployment using traditional stationarity tests and non-linear transformation methods to identify two further characteristics of hysteresis, namely, remanence and selective memory. In the second part of the paper, we estimate a simple insider–outsider model using a Bayesian vector autoregression methodology to identify the shocks driving unemployment dynamics. The main finding is that mark-up shocks and negative productivity shocks are the main drivers of unemployment, with demand shocks playing a secondary role. Nominal wages are not responsive to real shocks and are an important component of inflation. These results point to the difficulty of absorbing the current level of unemployment without a significant increase in the flexibility of goods and labour markets. At the same time, the evidence suggests that, if reforms are being implemented, demand policies can play a significant role in improving employment and growth, reversing the structural unemployment evident in the data.

This paper estimates a New Keynesian wage Phillips curve for South Africa to determine the responsiviness of nominal wages to employment conditions. The estimation is based on a New Keynesian model with staggered nominal wages setting and where all variations in hired labour input is taking place at the extensive margin. First we estimate the model using aggregate data from 1971 to 2013. The aggreagate estimations show that private sector nominal wages are not responsive to employment conditions, while they show a certain sensitivity to inflation and quite a good correlation with inflation expectations. The relationship between private sector nominal wage inflation and employment is clearly weak for the whole sample, and it becomes insignificant at the end of the sample, indicating an increase of wage rigidities in the post-apartheid South Africa. On the other hand the relationship between nominal wage inflation and price inflation is quite strong and robust for the whole sample but it becomes quantitatively weak for the inflation targeting period. In this period Trade Union inflation expectations are instead strongly correlated with nominal wage inflation. In the second part of the paper we look at the relationship between nominal wage, productivity and the reservation wage, using a panel of nine industrial sectors over the period 1970- 2013 The findings confirms that nominal wages inflation have consistently outpaced the growth in productivity, even after correcting for inflation, and that employment conditions had little effect on wage dynamics. We also test for the possibility that the dynamic of wages is anchored by an underlined reservation wage to investigate the presence of an error correction in a wage equation for South Africa. The results show that labour productivity has a direct effect on wages and the reservation wage. The overall picture that comes out from the analysis is of a wage formation mechanism that is very insensitive to overall macroeconomic conditions.

This paper investigates cross-sectoral productivity differentials in South African industry and their distributional consequences. The analysis shows that typically, traded sectors have experienced low productivity growth over the past decade, while skill intensive service sectors have had significant productivity growth. This is the inverse of the traditional Balassa-Samuelson sectoral transformation hypothesis, where high wages in high-productivity traded sectors increase wages throughout the economy, thus increasing prices on non-traded goods and revaluing the country’s real exchange rate. Instead, the higher productivity of non-traded sectors experienced in South Africa induces a devaluation of the real exchange rate and a contraction of the traded sectors. The results of the estimation show evidence of this "inverse" Balassa-Samuelson effect for agriculture and manufacturing and in particular mining. This "inverse" Balassa-Samuelson effect has important distributional consequences - the high-productivity sectors are associated with cheaper goods and services for wealthy households. This in turn burdens poor households, which are more dependent on traded goods, with higher prices, which are a consequence of low productivity and high markups.