Time-series analysis of the interactions between productivity, real wage, investment spending and sectoral employment in South Africa

Abstract

Maintaining a growing and sustainable level of employment within the unstable global market is crucial for establishing an enabling economic and social atmosphere for economic growth, development and social wellbeing. Different economic theories indicate that investment spending, labour productivity and real wage are some of vital indicators or determinants of employment levels. Nonetheless, the effect of these factors on employment patterns in a fast fluctuating and significantly unified global market economy remains a subject of discussion. Additionally, since employment and unemployment are depicted based on different factors, it is difficult to establish a common definition that includes various factors in distinct periods. Consequently, a number of theories suggest various solutions to create new jobs and reduce the unemployment rate. Manifold empirical studies have shown a mixture of findings on the relationship between employment, labour productivity, and investment spending and real wage. Consequently, no single, unique or mutual empirical consensus has ever been presented. Additionally, various economic theories argue that potential effects of labour productivity, investment spending and real wage either in primary, secondary or tertiary sectors on country’s employment patterns differ according to job orientation within distinct economic sectors. In consideration to the abovementioned facts, this study was conducted with the main objective of investigating the interaction between investment spending, labour productivity, real wage and sectoral employment. The study considered the role of each category of economic sector (primary, secondary and tertiary) towards employment fluctuations. It was, therefore, ascertained that the long-run and short-run relationship exist between the mentioned economic variables from 1995 and 2017. Similarly, the study established the causal relationship and the direction of causality between investment spending, labour productivity, real wage and sectoral employment. Furthermore, the effect and causality between sectoral employments was analysed and the study depicted how changes in one sector’s employment affects other sectors’ employment. The study employed several statistical and econometric approaches and models, which included the descriptive analysis, the standard ARDL, the nonlinear ARDL, bound test for co-integration, the Toda-Yamamoto Granger causality test and the dynamic multipliers analysis. These statistical and econometric approaches were applied on a set of macroeconomic time series namely investment spending, labour productivity, real wage and sectoral employment (employment in construction, financial, manufacturing, mining, trade and transport) for the period stretching from 1995 to 2017. The empirical results revealed that both standard ARDL and NARDL reached the same core conclusion suggesting the existence of a long-run relationship between sectoral employment, investment spending, labour productivity and real wage. However, despite this general conclusion, the NARDL failed to determine positive and negative impacts from one variable to the other. It was found that growth within investment spending leads to job creation in most of the analysed sectors. In line with the growth theory, the results also revealed that an increase in real wage negatively influences job growth in most of the analysed sectors with the exception of the mining sector. Labour productivity does not influence sectoral employment and ineffectiveness of labour productivity towards employment growth can be a result of other factors, not investigated by the current study, such as advanced technology. Comparing the effect of changes in one sector’s employment towards other sectors’ job creation, employment in construction sector was found more influential. Jobs created in this sector have a positive spill-overs in other four sectors’ employment namely; finance, manufacturing, mining and trade sectors. The trade sector seconded the construction sector in affecting job creation across the South African major economic sectors. Positive changes in trade sector employment leads to job growth in construction, finance and mining. Although the finance sector was found to be positively influenced by wages, investment and productivity, its job growth has a positive effect only on trade and transport sectors; with negative effects towards employment growth in construction, manufacturing and mining sector. Analysing how sectoral employment affect investment spending, labour productivity and real wage, the study findings indicate that changes of employment in manufacturing, mining and trade sectors cause changes in investment spending. Employment level in finance and mining sectors are the short-term predictors of labour productivity, while real wage, in the short-run, can be predicted using only employment in mining sector. Considering the interplay between labour productivity, investment spending and real wage, it was found that real wage possesses a long-run effect on investment spending and labour productivity. Finally, the study highlighted the significance of investment growth towards job creation in the South African economy. Additionally, without ignoring other economic sectors, financial and construction sectors require more support to boost employment in other sectors. The findings from this study can assist policymakers and economic authorities in developing strategies that are able to increase employment in South Africa and hence, reduce the consequences of unemployment on the South African economy and welfare.