Inflation and Unemployment in the South African Democratic Era: Is There Any Trade-off?

Abstract

South Africa has consistently suffered double-digit unemployment rates and unstable price levels, with a resultant stifling of economic growth rates. As a result, South Africa’s central bank policymakers have come under scrutiny regarding the adopted policy framework, which seems to be failing the economy with the growing unemployment rate and overall price level increments to prevail and triggering worsened standards of living for citizens. To close the gap in the existing literature, this study examined the trade-off between inflation and unemployment rates in South Africa and its implication on the economy post-1994. The Autoregressive Distributed Lag modelling technique was adopted by this study, where quarterly data spanning from 1994Q1 to 2019Q4 was analysed. Findings dismiss the existence of both the Phillips Curve and the New Keynesian Phillips Curve in South Africa as the inflation and unemployment rates as no Granger causality running from unemployment to inflation was observed from 1994Q1 to 2019Q4, even though there was a negative causality running from inflation, meaning that during these years, increases in the inflation rate resulted in marginal decreases in the unemployment rate. A recommendation to policymakers would be to focus less on inflation targeting, as it was discovered to have a small influence on the unemployment rate. Rather, given the finding that GDP was positively related to inflation, allowing inflation to move more freely could enable stable economic growth that has the potential of reducing unemployment. This study further recommends that the SARB bank should go for targeting output instead.