Persistently high unemployment in South Africa, especially in the face of improved economic conditions since 1994, begs the question: Does unemployment in South Africa respond to changes in output? When considering the linkages between output and unemployment, it is useful to decompose unemployment into its three components: structural, frictional and cyclical unemployment. Deficient aggregate demand gives rise to cyclical unemployment. Okun's law (1962) refers to the inverse relationship that exists between cyclical output and cyclical unemployment This paper estimates the relationship between economic activity (cyclical GDP) and changes in the unemployment rate (cyclical unemployment) for South Africa. A variety of detrending methods is used to decompose output and unemployment series into their trend and cyclical components. The paper also addresses the question of asymmetries in Okun's coefficient. The results indicate the presence of an Okun's law relationship in South Africa over the period 1970-2005 with more evidence in favour of asymmetries during recessions.
Working Paper 055
2007, South African Journal of Economics, 75(3), 373-90