The Effect of Exchange Rate Movements and Economic Growth on Job Creation

Open access

Abstract

Job creation is at the centre of economic development and remains a source of sustenance for social and human relations. The creation of a job-enabling economic environment is imperative in promoting social and economic cohesiveness in the macro and microeconomic environment. Any shocks to the economy, particularly those of exchange rate shocks and changes in economic growth, may negatively affect the labour market and job creation. This study made use of quarterly observations, from the first quarter of 1995 to the fourth quarter of 2015, to investigate the effect of the real exchange rate and economic growth on South Africa’s employment status. South Africa, a developing country, was selected as a case study due to its high unemployment rate that is still increasing. The Vector Autoregressive (VAR) model and multivariate co-integration techniques were used in assessing the impact and responsiveness of employment to the real exchange rate and real economic growth in South Africa. Findings of this study revealed that employment responds positively to economic growth and negatively to the real exchange rate in the long-run. The short-run displays a positive relationship between real economic growth and employment, while the relationship between employment and the real exchange rate is also negative. However, the effect of economic growth in creating jobs is not significant enough in stimulating job creation in South Africa, as indicated by results in variance decomposition. Movements in the exchange rate exerted a significant short and long-run negative effect on employment dynamics; implying that a depreciation of the rand against the U.S. dollar is associated with decrease in overall employment. Exchange rate stability is thus important for economic growth and job creation in South Africa. The study provided further recommendations on promoting job creation in South Africa and other developing countries.

If the inline PDF is not rendering correctly, you can download the PDF file here.

  • *IDC (Industrial Development Corporation) (2016). Economic trends: Key trends in the South African economy. http://www.idc.co.za/images/download-files/economic-overviews/RI-publication-Keytrends-in-SA-economy_March2016.pdf. Date of access: 09 November 2016.

  • *ILO (International Labour Organisation) (2016). World employment social outlook. http://www.ilo.org/wcmsp5/groups/public.pdf. Date of access: 24 March 2016.

  • * Deloitte. (2016). Rand depreciation a boon for South African outsourcing industry. Https://www2.deloitte.com/content/dam/Deloitte/za/Documents.pdf. Date of access: 14 September 2016.

  • Abdel-Moneim M. A. (2015). A political economy of Arab education: Policies and comparative perspectives. New York: Routledge.

  • Alexandre F. Bacao P. M. A. Cerejeira J. & Portela M. (2010). Employment exchange rates and labour market rigidity. IZA Discussion Paper 4891(1):1-32.

  • Alexandre F. Bação P.M.A Cerejeira J. & Portela M. (2011). Employment and exchange rates: The role of openness and technology. Open Economies Review 22(5):969-984.

  • Allen R.C. (1986). Growth and fluctuations in the BC economy. Vancouver: Canada.

  • Altman M. (2003). Jobless or job creating growth? Some preliminary thoughts. Employment and Economic Policy Research Program Human Sciences Research Council. Paper Presented at the TIPS/DPRU Annual Forum. http://intranet.hsrc.ac.za. Date of access: 02 November 2016.

  • Belke A. & Kaas L. (2004). Exchange rate movements and employment growth: An OCA assessment of the CEE economies. Empirica 31(3):247-280.

  • Bergh G. & Zanker F. (2013). What is the evidence on the impact of employment creation on stability and poverty reduction in fragile states. London: Overseas Development Institute.

  • Bhorat H. Tian N. & Ellyne M. (2014). The real exchange rate and sectoral employment in South Africa. DPRU working paper no. 201404. Cape Town: University of Cape Town.

  • Biyase M. & Bonga-Bonga L. (2015). The relationship between growth and employment in South Africa: structural vector autoregressive analysis. Environmental Economics 6(2):54-58.

  • Bonner K. Anyadike-Danes M. & Hart M. (2011). Job creation and destruction in the UK: 1998-2010. Birmingham: Aston University.

  • Brooks C. (2014). Introductory econometrics for finance. 3rd ed. Cambridge: Cambridge University Press.

  • Burgess S. M. & Knetter M. M. (1998). An international comparison of employment adjustment to exchange rate fluctuations. Review of International Economics 6(1):151-163.

  • Burgess S. Lane J. & Stevens D. (2000). Job flows worker flows and churning. Journal of Labour Economics 18(3):473-502.

  • Callen T. (2008). What Is Gross Domestic Product? http://www.imf.org/external/pubs.pdf. Date of access: 21 October 2016.

  • Campa J. M. & Goldberg L. S. (2001). Employment versus wage adjustment and the US dollar. Review of Economics and Statistics 83(3):477-489.

  • Chen R. & Dao M. 2011. The real exchange rate and employment in China. IMF Working Papers 148(11):1-50.

  • Chen Y. T. & Kuan C. M. (2003). A generalized Jarque-Bera test of conditional normality. Working paper no. 03-A003. Taipei: Institute of Economics Academia Sinica.

  • Chili N. A. (2000). Economic growth and employment in South Africa: A critical policy analysis. Doctoral Dissertation formerly: Rand Afrikaans University now University of Johannesburg.

  • Chimnani H. Bhutto N. A. Butt F. Shaikh S. A. & Devi W. (2012). Exchange rate and unemployment. http://umt.edu.pk/icobm2012/pdf/2C-84P.pdf. Date of access: 10 October 2016.

  • Davis S. J. Faberman R. J. & Haltiwanger J. (2006). The flow approach to labour markets: New data sources and micro–macro links. The Journal of Economic Perspectives 20(3):3-26.

  • Davis S. J. Haltiwanger J. & Faberman R. J. (2005). The flow approach to labour markets: New data sources Micro-Macro Links and the Recent Downturn. Discussion paper no. 1639. College Park: University of Maryland.

  • Erdal B. 2001. Investment decisions under real exchange rate uncertainty. Central Bank Review 1(1):25-48.

  • Frain J. C. 2007. Small sample power of tests of normality when the alternative is an α-stable distribution. TEP working paper no. 0207. Dublin: Trinity College Dublin Department of Economics.

  • Fujita S. & Nakajima M. (2016). Worker flows and job flows: A quantitative investigation. Review of Economic Dynamics 22(1):1-20.

  • Funlayo O. E. (2013). The impact of economic growth on employment in Nigeria. International Business and Management 6(1):113-119.

  • Gill M. (2013). Employment and the economics of job creation. http://www.lexisnexis.co.za/pdf/Keynote-Address-Employment-the-economy-andgrowth.pdf. Date of access: 09 September 2016.

  • Gourinchas P. O. (1999). Exchange rates and jobs: What do we learn from job flows? In NBER Macroeconomics Annual 13(1):153-222.

  • Guisinger A. Y. Hernandez-Murillo R. Owyang M. & Sinclair T. M. (2015). A state-level analysis of Okun's Law. FEDL Working Paper no. 2015-029A. St. Louis: Federal Reserve Bank.

  • Habanabakize T. & P. F. & Muzindutsi P.F. (2015). Time series analysis of interaction between aggregate expenditure and job creation in South Africa. Journal of Governance and Regulation 4(4):649-657.

  • Hain J. (2010). Comparison of common tests for normality. http://www.statistik-mathematik.uni-wuerzburg.de/fileadmin/10040800.pdf. Date of access: 04 October 2016.

  • Haltiwanger J. Kugler A. Kugler M. Micco A. & Pages C. (2004). Effects of tariffs and real exchange rates on job reallocation: evidence from Latin America. The Journal of Policy Reform 7(4):191-208.

  • Hendriks J. F. (2016). Critical evaluation of possible policy options to reduce unemployment in South Africa. http://etd.uwc.ac.za/xmlui/bitstream/handle.pdf. Date of access: 08 November 2016.

  • Herman E. (2011). The impact of economic growth process on employment in European Union countries. The Romanian Economic Journal 14(42):47-67.

  • Huang H. & Tang Y. (2015). How did exchange rates affect employment in U.S. cities? Contemporary Economic Policy 34(4):678-697.

  • Hull K. (2009). Understanding the relationship between economic growth employment and poverty reduction. Promoting Pro-Poor Growth: Employment 1(1):69-94.

  • Irmen A. (2005). Extensive and intensive growth in a neoclassical framework. Journal of Economic Dynamics and Control 29(8):1427-1448.

  • Kakes J. (2000). Monetary transmission in Europe: The role of financial markets and credit. Cheltenham UK: Edward Elgar Publishing.

  • Kapsos S. (2005). The employment intensity of growth: Trends and macroeconomic determinants. Working Paper 2005/12. Employment Strategy Papers. International Labour Office.

  • Kapsos S. (2006). The employment intensity of growth: Trends and macroeconomic determinants. Labour markets in Asia. UK London: Palgrave Macmillan p.143-201.

  • Keller J.R. (2015). Markets networks and the internal allocation of human resources: How managers create value through internal hiring. http://mitsloan.mit.edu/iwer/wp-content/uploads.pdf. Date of access: 11 September 2016.

  • Keynes J. M. (1937). The general theory of employment. The Quarterly Journal of Economics 51(2):209-223.

  • Kim W. (2005). Analyses of the relationship between exchange rates and employment in Korea. Journal of Economic Development 30(2):131-153.

  • Klein M. W. & Shambaugh J. C. (2012). Exchange rate regimes in the modern era. MIT Press. http://www.jstor.org/stable/j.ctt5hhbcb. Date of access: 08 November 2016.

  • Klein M. W. Schuh S. & Triest R. K. (2002). Job creation job destruction and international competition: A literature review. Working Paper no. 02-7. Boston: Federal Reserve Bank.

  • Klein M. W. Schuh S. & Triest R. K. (2003). Job creation job destruction and the real exchange rate. Journal of International Economics 59(2):239-265.

  • Kundu M. G. Mishra S. & Khare D. (2011). Specificity and Sensitivity of Normality Tests. https://xa.yimg.com/kq/groups/16412409/1720123946/name/ISOS_Art+01_Kundu_pp.+14_Corrected.pdf. Date of access: 08 November 2016.

  • Laubscher J. (2013). Economic growth in South Africa: a 20-year review. http://www.moneyweb.co.za/archive/economic-growth-in-south-africa-a-20year-review/. Date of access: 08 November 2016.

  • Leshoro T. L. (2013). Does Economic Growth Lead Employment in South Africa? Journal of Economics and Behavioural Studies 5(6):336-345.

  • Lipton D. (2013). South Africa: Facing the challenges of the global economy https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp050813. Date of access: 06 November 2016.

  • Liu H. Idrees Z. Satti J. A. & Nazeer A. (2015). Exchange rate volatility and oil prices shocks. International Journal of Academic Research in Business and Social Sciences 5(1):249-256.

  • Loots E. (1998). Job creation and economic growth. South African Journal of Economics 66(3):155-163.

  • Magee L. (2013). Unit roots cointegration VARs and VECMs. http://socserv.mcmaster/magee.pdf. Date of access: 05 November 2016.

  • Mahadea D. & Simson R. (2010). The challenge of “low employment economic growth” in South Africa: 1994-2008. http://www.scielo.org.za/pdf/sajems/v13n4/a02.pdf. Date of access: 6 April 2016.

  • Malakwane C. T. (2012). Economic and social effects of unemployment in South Africa: Prospects for the future. Doctoral dissertation Tshwane University of Technology Pretoria.

  • Martins P. & Takeuchi R. L. (2013). Employment in a post-2015 framework: Proposals for monitoring indicators. ODI working paper no. 1. London: Overseas Development Institute.

  • Mensah M. Awunyo-Vitor D. & Asare-Menako H. 2013. Exchange rate volatility and employment growth in Ghana's manufacturing sector. International Journal of Business and Social Science 4(4):225-232.

  • Meyer D. F. (2014). Job creation a mission impossible? The South African case. Mediterranean Journal of Social Sciences 5(16):65-77.

  • Michaillat P. & Saez E. (2015). Aggregate demand idle time and unemployment. The Quarterly Journal of Economics 130(2):507-569.

  • Mpofu T. R. (2013) Real exchange rate volatility and employment growth in South Africa: The case of manufacturing! In: ECCE-USB Conference Papers March 2013.

  • Mpofu T. R. (2015). Exchange rate volatility employment and macroeconomic dynamics in South Africa. Doctoral dissertation University of Cape Town: Cape Town.

  • Mukhtar T. & Rasheed S. (2010). Testing a long run relationship between exports and imports: Evidence from Pakistan. Journal of Economic Cooperation and Development 31(1):41-58.

  • Mushtaq R. (2011). Augmented Dickey Fuller Test. http://dx.doi.org/10.2139/ssrn.1911068. Date of access: 05 November 2016.

  • Muzindutsi P.F. & Maepa M.M. (2014). Manufacturing production and non-agricultural employment rate in South Africa: Time series analysis. Journal of Economics and Behavioral Studies 6 (10): 779-786.

  • Ngandu S. N. (2008). Exchange rates and employment. South African Journal of Economics 76(2):205-221.

  • Ngandu S. N. (2009). The impact of exchange rate movements on employment: The economy-wide effect of a rand appreciation. Development Southern Africa 26(1):111-129.

  • Nielsen B. (2005). Analysis of co-explosive processes. UK: Nuffield College.

  • Niyimbanira F. (2015). Fuel price and exchange rate dynamics in South Africa: A time series analysis Corporate Ownership & Control 12(4) 185-193.

  • Noumbissie F. F. & Mongale I. P. (2014). The impact of monetary policy on financial markets in South Africa: A VAR analysis. Journal of Economics and Behavioral Studies 6(8):636-646.

  • Nucci F. & Pozzolo A.F. (2010). The exchange rate employment and hours: What firm-level data say. Journal of International Economics 82(2):112-123.

  • Okun A.M. (1962). Potential GNP its measurement and significance. Yale University Connecticut US: Cowles Foundation.

  • Ozturk I. (2006). Exchange rate volatility and trade: A literature survey. International Journal of Applied Econometrics and Quantitative Studies 3(1):85-102.

  • Razali N. M. & Wah Y. B. (2011). Power comparisons of Shapiro-Wilk Kolmogorov-Smirnov Lilliefors and Anderson-Darling tests. Journal of Statistical Modeling and Analytics 2(1):21-33.

  • Ribeiro E. P. Corseuil C. H. Santos D. Furtado P. Amorim B. Servo L. & Souza A. (2004). Trade liberalization the exchange rate and job flows in Brazil. The Journal of Policy Reform 7(4):209-223.

  • Riegler M. (2014). The impact of uncertainty shocks on the job-finding rate and separation rate. Working Paper no. 337. London: Job Market Papers.

  • Rusike G. (2016). South Africa Ratings Affirmed; Outlook Remains Negative on Weak Growth. http://cdn.bdlive.co.za/images/pdf/SArating.pdf. Date of access: 14 September 2016.

  • Ruxanda G. & Botezatu A. (2008). Spurious regression and cointegration numerical example of Romania's M2 money demand. Romanian Journal of Economic Forecasting 5(3):51-62.

  • Saikkonen P. & Lüetkepohl H. (2000). Testing for the cointegrating rank of a VAR process with an intercept. Econometric Theory 16(03):373-406.

  • SARB (South African Reserve Bank). (2016). Statistics. https://www.resbank.co.za/Research/Statistics/Pages/Statistics-Home.aspx. Date of access: 26 October 2016.

  • Schmid G. (2008). Full employment in Europe: Managing labour market transitions and risks. UK: Edward Elgar Publishing Inc.

  • Sims C. A. (1980). Macroeconomics and reality. Econometrica: Journal of the Econometric Society 48(1):1-48.

  • Sodipe O. A. & Ogunrinola O. I. (2011). Employment and economic growth nexus in Nigeria. International Journal of Business and Social Science 2(11):232-239.

  • Sögner L. & Stiassny A. (2000). A cross-country study on Okun's Law. Working Paper no. 13.Vienna: WU Vienna University of Economics and Business.

  • StatsSA (Statistics South Africa). 2016. Quarterly labour force survey: Quarter 1 2016. Pretoria: Statistics South Africa.

  • Tattara G. & Valentini M. (2004). Job flows worker flows in Veneto manufacturing. 1982-1996. Dept of Economics University of Venice “Ca’Foscari” Nota di lavoro 7(1):1-22.

  • Tjukanov T. (2011). Gross Domestic Product as a modern-day economic indicator. https://www.theseus.fi/bitstream/handle. Date of access: 21 October 2016.

  • UNDP (United Nations Development Programme). (2015). Human Development Report: Work for human development. http://hdr.undp.org/sites/all/themes.pdf. Date of access: 11 September 2016.

  • Van der Merwe E. & Mollentze S. (2010). Monetary economics in South Africa. Cape Town: Oxford University Press Southern Africa.

  • Vermeulen C. (2015). Inflation growth and employment in South Africa: Trends and trade-offs. ERSA Working Paper no. 547. Cape Town: Department of Economics.

  • World Bank. (2016). South Africa economic update: Seizing the window of demographic opportunity. Http://www.worldbank.org/en/country/southafrica. Date of access: 23 March 2016.

  • Yokoyama I. Higa K. & Kawaguchi D. (2015). The effect of exchange rate fluctuations on employment in a segmented labour market. Research Institute of Economy Trade and Industry (RIETI). http://hias.ad.hit-u.ac.jp/wp-content/uploads.pdf. Date of access: 02 November 2016.

  • Zanini F. C. Irwin S. H. Schnitkey G. D. & Sherrick B. J. (2000). Estimating farm-level yield distributions for corn and soybeans in Illinois. http://ageconsearch.umn.edu.pdf. Date of access: 02 November 2016.

Search
Journal information
Metrics
All Time Past Year Past 30 Days
Abstract Views 0 0 0
Full Text Views 765 141 7
PDF Downloads 453 93 1