Quantifying shifts in primary factor demand in the South African economy

ABSTRACT

This article uses a dynamic computable general equilibrium model to explain the persistence in the high levels of unemployment in the South African economy in spite of modest to relatively strong output growth. We make use of a historical simulation for the period 2006–13 and find that the capital–labour ratio increased despite a relative increase in the rental price of capital. Classical economic theory suggests that changes in industry preferences toward capital and labour lead to adjusted capital–labour ratios. We quantify the changes in industry factor preferences during this period and highlight their impact in explaining observed labour market outcomes. Other changes in the economy over this period are also quantified.

KEYWORDS:

• Capital–labour ratio
• unemployment
• computable general equilibrium model
• GEMPACK

JEL CLASSIFICATION:

• C68

Acknowledgement

The authors gratefully acknowledge Economic Research Southern Africa (ERSA) in respect of a grant for the original version of this paper published in the ERSA working paper series, Working Paper No. 416, under the title ‘A Historical CGE Simulation of the South African Economy from 2006–2013: Analysing the Changes in the Use of Primary Factors by Industries’.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹This method of implementing cost-neutral preference twists eliminates a problem arising with these variables when set as exogenous in policy simulations. The same method is used to implement cost-neutral import/domestic preference twists.

²The two ‘back-of-the-envelope' formulae in equations (5) and (6) are easily derived by maximising economy-wide profits, P_y.Y – (W.L + Q.K), subject to a Cobb–Douglas production function where Y = A[L^β.K^{(1 – β)}].

Additional information

Funding

The authors received a grant from Economic Research Southern Africa.