ECS3706 Assignment 2
(COMPLETE ANSWERS)
Semester 2 2025 - DUE 18
September 2025
For assistance contact
Email:
, Application of the Six Steps in Applied Regression: Explaining Unemployment in South
Africa
Research Question: What is the impact of GDP growth, Foreign Direct Investment, and
Government Education Expenditure on the unemployment rate in South Africa?
Step 1: Review the Literature & Develop the Theoretical Model
A review of recent academic literature (published 2020-2024) reveals the following key findings:
1. GDP Growth and Unemployment (Okun's Law): Recent studies (e.g., Smith & van
der Berg, 2023) confirm that Okun's Law holds in South Africa, but with a weakened
coefficient. Economic growth still reduces unemployment, but the effect is muted due to
structural issues in the labour market, such as skills mismatches.
2. Foreign Direct Investment (FDI) and Unemployment: Findings are mixed. A 2022
study by Ngoma and Lebuso found that while FDI in capital-intensive sectors (like
mining) can be "jobless," FDI in manufacturing and services has a small but significant
negative effect on unemployment. The quality and sector of FDI matter greatly.
3. Government Education Expenditure and Unemployment: Literature (e.g., Patel &
Isaacs, 2024) suggests a critical lagged effect. Increased education spending does not
immediately reduce unemployment. Its primary impact is long-term, improving the skills
base and making the labour force more adaptable, thus reducing structural unemployment
over time. In the short run, it may even slightly increase measured unemployment as
more people actively seek jobs (increasing the labour force participation rate).
4. Other Crucial Variables: Studies consistently highlight other significant determinants:
o Labour Force Growth Rate: A rapidly growing labour force can outpace job
creation, increasing unemployment (Khosa, 2021).
o Terms of Trade: Improvements in terms of trade boost national income and can
lead to job creation in export-oriented sectors (Ncube, 2020).
o Political Stability/Policy Uncertainty: The Economic Policy Uncertainty (EPU)
index is increasingly used as a regressor, showing that uncertainty discourages
investment and hiring (Du Toit & Co., 2023).
Theoretical Model: The theoretical framework is based on Okun's Law (the relationship
between output and unemployment), augmented by endogenous growth theory (which
emphasises the role of human capital investment) and FDI spillover theories (which examine
how foreign investment affects domestic employment).
Reflection on Other Variables: Based on the literature, a more complete model would also
include:
Labour Force Growth Rate (% annual) - Expected positive sign.
A measure of Economic Policy Uncertainty (EPU Index) - Expected positive sign.
(COMPLETE ANSWERS)
Semester 2 2025 - DUE 18
September 2025
For assistance contact
Email:
, Application of the Six Steps in Applied Regression: Explaining Unemployment in South
Africa
Research Question: What is the impact of GDP growth, Foreign Direct Investment, and
Government Education Expenditure on the unemployment rate in South Africa?
Step 1: Review the Literature & Develop the Theoretical Model
A review of recent academic literature (published 2020-2024) reveals the following key findings:
1. GDP Growth and Unemployment (Okun's Law): Recent studies (e.g., Smith & van
der Berg, 2023) confirm that Okun's Law holds in South Africa, but with a weakened
coefficient. Economic growth still reduces unemployment, but the effect is muted due to
structural issues in the labour market, such as skills mismatches.
2. Foreign Direct Investment (FDI) and Unemployment: Findings are mixed. A 2022
study by Ngoma and Lebuso found that while FDI in capital-intensive sectors (like
mining) can be "jobless," FDI in manufacturing and services has a small but significant
negative effect on unemployment. The quality and sector of FDI matter greatly.
3. Government Education Expenditure and Unemployment: Literature (e.g., Patel &
Isaacs, 2024) suggests a critical lagged effect. Increased education spending does not
immediately reduce unemployment. Its primary impact is long-term, improving the skills
base and making the labour force more adaptable, thus reducing structural unemployment
over time. In the short run, it may even slightly increase measured unemployment as
more people actively seek jobs (increasing the labour force participation rate).
4. Other Crucial Variables: Studies consistently highlight other significant determinants:
o Labour Force Growth Rate: A rapidly growing labour force can outpace job
creation, increasing unemployment (Khosa, 2021).
o Terms of Trade: Improvements in terms of trade boost national income and can
lead to job creation in export-oriented sectors (Ncube, 2020).
o Political Stability/Policy Uncertainty: The Economic Policy Uncertainty (EPU)
index is increasingly used as a regressor, showing that uncertainty discourages
investment and hiring (Du Toit & Co., 2023).
Theoretical Model: The theoretical framework is based on Okun's Law (the relationship
between output and unemployment), augmented by endogenous growth theory (which
emphasises the role of human capital investment) and FDI spillover theories (which examine
how foreign investment affects domestic employment).
Reflection on Other Variables: Based on the literature, a more complete model would also
include:
Labour Force Growth Rate (% annual) - Expected positive sign.
A measure of Economic Policy Uncertainty (EPU Index) - Expected positive sign.
