Effect of monetary policy on unemployment in South Africa: an econometric approach.

Abstract

In 2021, South Africa recorded an unemployment rate of 32.6% and in the fourth quarter of the same year, the official unemployment rate hit a high record of 35.3%, the highest since 2008 when Statistics South Africa started the Quarterly Labour force survey. In South Africa, unemployment has been consistently high and rising for the past two decades. Different policies have been put in place over the years to reduce unemployment; however, they have seen little success. This paper investigates how each monetary policy tool influences the level of unemployment in South Africa. It uses an Autoregressive Distributed Lag model to examine for a long-run relationship amongst the variables from the years 1980 to 2020. The findings indicate that the monetary policy used tools influence unemployment in South Africa. Based on results, the South African Reserve Bank should increase money supply and decrease the real interest rate, particularly the prime rate, in order to create employment, though this is not its constitutional obligation. The depreciating exchange rate also shows signs of decreasing unemployment in the shortrun and long-run. The paper concludes that as much the South African Reserve Bank is mandated to the keep inflation rate between 3% and 6%, it should not only use interest rate as the only tool to achieve its inflation target goal. This is because when the country is facing cost push inflation; thus, interest rate could not be the best tool to deal with it especially when the country is also facing stagflation situation.