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

function relationship, with the maximum level of output consistent with stable inflation.
Potential employment is defined as the level of labour resources that might be employed without
resulting in additional inflation and is determined by adjusting the actual labour input used in the
estimated production function for the gap between actual unemployment and the estimated non-
accelerating wage rate of unemployment (NAWRU).

The estimation results for the NAWRU indicate an upward trend, implying that an “equilibrium
or natural” rate of unemployment exists. These results can be attributed to the hysteresis nature
of unemployment in South Africa.

The results obtained for potential output based on the structural production function approach
indicate that the potential, “sustainable” growth rate (maximum level of output consistent with
stable wage inflation) for South Africa, is about 3 per cent, which is quite a margin lower than the
7 per cent growth rate, that we all would like to see.

Given the fact that the potential growth rate is less than expected, the capacity of the South
African economy is lower than anticipated, resulting in output gaps fluctuating around 100 per
cent and not between levels of 80 and 90 per cent as revealed by the surveys of the South African
Reserve Bank. The structural problems, evident from the upward trending NAWRU, contribute
to the fact that South Africa’s potential to grow has been diminishing over time and that
increases in output put pressure on wages and prices much faster than popular opinion would
hold.

South Africa’s rate of unemployment is of both a structural and a cyclical nature. A significant
part of the South African labour force is unskilled which is becoming increasingly expensive
relative to skilled labour, and the international tendency towards capital-intensive production
acquiring more capital, more skilled labour and less unskilled workers, has aggravated the
unemployment problem. Apart from the structural component of unemployment, the growth in

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