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

The NAWRU can be interpreted as the rate of unemployment at which the wage inflation will be
constant, and therefore, theoretically it can be referred to as the “equilibrium or natural rate of
unemployment”.

Endogenising technological progress

Endogenising technological progress has been approached as follows (Du Toit, et al. 2004). The
Cobb-Douglas production function (equation 1) has, in place of At,a time-varying coefficient
(ξ _t). The model essentially contains three equations, namely, the two equations set out below to
obtain a measure for total factor productivity or technological progress, and then the explanation
thereof.

Yt =ξtKt^αNt^βe^wt                                                                                     (6)

ξt =ξt-1+vt                         vt ~ N(0,Q).                                                       (7)

with

wt, vt    =      Stochastic disturbance terms

ξt      =      The time varying constant, representing technological progress

Equation (6) represents the measurement (or observation) equation of the state-space model in
Kalman filter terms, while equation (7) represents the state (or transition) equation.

In a subsequent step, the variable representing technological progress is then explained using
variables such as expenditure on R&D, patents registered and the number of scientists and
engineers. Technology transfer is allowed for by two variables, namely a measure of the openness
of the economy to international trade and other international factors (represented by a weighted-
average index) such as exchange rate, foreign investment, level of domestic and international
competitiveness, share in world trade, etc. The latter also captures the underlying institutional
factors in the economy.

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