Is There an Inflation–GDP Growth–Employment Nexus in South Africa Within the 6 per cent Inflation Threshold?

Abstract

This chapter explores the extent to which price stability plays a role in the GDP-employment growth nexus in South Africa. Evidence shows that the negative employment gap does not dampen wage price pressures, while the decline in consumer price inflation is insignificant. The divergence suggests that the pricing mechanism responds sluggishly to the increase in the spare capacity in the labour market with little impact on consumer prices. Furthermore, wage price inflation fluctuates more than consumer price inflation, indicating that the former is the main transmitter of unexpected employment growth slack. The error-correction analysis shows that employment growth in the low-inflation regime corrects at nearly twice the speed of adjustment of the high-inflation regime. This means that failure to recognise inflation regimes leads to a slow speed of adjustment in employment growth in the high-inflation regime compared to that achieved in the low-inflation regime.

 Furthermore, GDP growth explains a higher variability in employment growth when inflation is below the 6 per cent threshold than when it is above it. The policy implication is that price stability plays a role in facilitating a faster speed of adjustment in employment growth when it departs from equilibrium. The low-inflation regime amplifies the transmission of positive GDP growth shocks to employment growth by nearly seven times more times after the initial shock. This means that the inflation channel plays an important role in the GDP-employment growth nexus. Thus, price stability matters for an improved GDP-employment growth nexus.