Does South Africa Have the Potential and Capacity to Grow at 7 Per Cent?: A Labour Market Perspective

a = -(D³ log W)/DU
which, in turn, is used to give the estimated NAWRU as:

NAWRU =U-(DU/D³logW)D²logW .                                   (5)

The resulting NAWRU series is then smoothed, again using a Hodrick-Prescott filter to eliminate
erratic movements. The information utilised in the above expression for the NAWRU is
endogenised. Both the unemployment and the real wage rates result from a consistent
neoclassical labour model (distinguishing between the skilled and unskilled markets), which in
turn forms part of a supply-side model (see figure1) for South Africa where prices are also
endogenously determined by the system as a whole. This measure for the NAWRU can
therefore be classified as a wage-price model approach.

Figure 1: Supply-side structure of the macro-econometric model

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