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

The estimated production function for South Africa has proven to be of Cobb-Douglas
technology (Du Toit, 1999) and is represented by the following expression:

Y =A_tK_t^αN_t^β

with

Yt = actual gross domestic product at factor cost

At = unobservable technical progress or technology (including factor productivity)

Nt = actual employment

Kt = actual capital stock
α = capital share parameter
β = labour share parameter

(α + β) is restricted to 1; assuming constant returns to scale technology

Potential output is determined by substituting trend total factor productivity (A^* ), actual capital
stock² (K) and potential employment (N ^* ) back into the estimated production function.

In this analysis the measure of potential employment is defined as the level of labour resources
that might be employed without resulting in additional inflation. This amounts to 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).
However, should “potential” be defined as the maximum output level, then potential
employment would be represented by the entire labour force of working age (economically active
population), thereby assuming that everyone of working age (excluding those voluntarily
unemployed) has the potential and necessary skills to fill the available job openings. Should

Since our focus is the labour market, and not the capital market.

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