ECS3706
Assignment 2 Semester 2 2025
Unique #
Due Date: 18 September 2025
Detailed solutions, explanations, workings
and references.
+27 81 278 3372
, QUESTION 1
STEP 1: LITERATURE REVIEW AND DEVELOPMENT OF THEORETICAL
MODEL
Unemployment is one of South Africa’s most persistent macroeconomic challenges,
exacerbated by slow GDP growth, limited foreign investment, and skills mismatch in
the labour market. Understanding the key drivers behind unemployment helps
policymakers make informed decisions. Economic theory suggests that growth,
investment, and human capital are critical in shaping employment outcomes. This
step reviews recent literature (within the past 5 years) and proposes a model to
capture the relationships.
Recent Journal Articles
1. Khambule & Nomdo (2022) examined the relationship between government
spending and unemployment in South Africa. Their findings showed that
increased public spending on education positively affects long-term
employability, but short-term effects are minimal.
2. Adegbite & Ayadi (2021) found a statistically significant negative relationship
between FDI and unemployment in sub-Saharan African countries. The study
noted that stable investment climates attract FDI that creates jobs, particularly
in the industrial and services sectors.
3. Chinomona & Hlongwane (2023) used regression analysis to explore how
GDP growth impacts unemployment in BRICS countries. Their findings
confirm Okun’s Law, which states that unemployment falls as GDP increases,
but the relationship is weak in countries with structural labour market issues.
4. Ngwenya & Mokoena (2020) studied education funding and labour
absorption in South Africa. They concluded that while public education
spending is high, the quality and relevance of education for the labour market
are key missing links.
5. Mpofu & Mlambo (2023) assessed the role of government policy in mediating
the effects of FDI on employment in developing economies. Their study
suggested that FDI’s job creation potential is mediated by local content
policies and infrastructure readiness.
1.3 Key Takeaways from the Literature
Varsity Cube 2025 +27 81 278 3372
, GDP growth is a critical but insufficient factor in reducing unemployment
without structural reforms.
FDI can reduce unemployment when policies support labour-intensive
investments.
Government expenditure on education has mixed effects depending on
efficiency and alignment with labour market needs.
Other relevant variables include labour market rigidity, inflation, industrial
productivity, youth population growth, and skills mismatch.
1.4 Theoretical Model
From the literature and macroeconomic theory (especially Okun’s Law and Solow
Growth Model), we propose the following linear regression model:
Where:
Unemployment = Unemployment rate (%)
GDP Growth = Annual real GDP growth (%)
FDI = Foreign direct investment inflows (% of GDP)
Education Expenditure = Government expenditure on education (% of GDP)
ϵt = Error term
1.5 Additional Variables to Consider in Extended Models
Although this model is focused on three core predictors, future models could
incorporate:
Labour productivity
Inflation rate
Population growth
Varsity Cube 2025 +27 81 278 3372
Assignment 2 Semester 2 2025
Unique #
Due Date: 18 September 2025
Detailed solutions, explanations, workings
and references.
+27 81 278 3372
, QUESTION 1
STEP 1: LITERATURE REVIEW AND DEVELOPMENT OF THEORETICAL
MODEL
Unemployment is one of South Africa’s most persistent macroeconomic challenges,
exacerbated by slow GDP growth, limited foreign investment, and skills mismatch in
the labour market. Understanding the key drivers behind unemployment helps
policymakers make informed decisions. Economic theory suggests that growth,
investment, and human capital are critical in shaping employment outcomes. This
step reviews recent literature (within the past 5 years) and proposes a model to
capture the relationships.
Recent Journal Articles
1. Khambule & Nomdo (2022) examined the relationship between government
spending and unemployment in South Africa. Their findings showed that
increased public spending on education positively affects long-term
employability, but short-term effects are minimal.
2. Adegbite & Ayadi (2021) found a statistically significant negative relationship
between FDI and unemployment in sub-Saharan African countries. The study
noted that stable investment climates attract FDI that creates jobs, particularly
in the industrial and services sectors.
3. Chinomona & Hlongwane (2023) used regression analysis to explore how
GDP growth impacts unemployment in BRICS countries. Their findings
confirm Okun’s Law, which states that unemployment falls as GDP increases,
but the relationship is weak in countries with structural labour market issues.
4. Ngwenya & Mokoena (2020) studied education funding and labour
absorption in South Africa. They concluded that while public education
spending is high, the quality and relevance of education for the labour market
are key missing links.
5. Mpofu & Mlambo (2023) assessed the role of government policy in mediating
the effects of FDI on employment in developing economies. Their study
suggested that FDI’s job creation potential is mediated by local content
policies and infrastructure readiness.
1.3 Key Takeaways from the Literature
Varsity Cube 2025 +27 81 278 3372
, GDP growth is a critical but insufficient factor in reducing unemployment
without structural reforms.
FDI can reduce unemployment when policies support labour-intensive
investments.
Government expenditure on education has mixed effects depending on
efficiency and alignment with labour market needs.
Other relevant variables include labour market rigidity, inflation, industrial
productivity, youth population growth, and skills mismatch.
1.4 Theoretical Model
From the literature and macroeconomic theory (especially Okun’s Law and Solow
Growth Model), we propose the following linear regression model:
Where:
Unemployment = Unemployment rate (%)
GDP Growth = Annual real GDP growth (%)
FDI = Foreign direct investment inflows (% of GDP)
Education Expenditure = Government expenditure on education (% of GDP)
ϵt = Error term
1.5 Additional Variables to Consider in Extended Models
Although this model is focused on three core predictors, future models could
incorporate:
Labour productivity
Inflation rate
Population growth
Varsity Cube 2025 +27 81 278 3372
