Question

QUESTION FIVE [10]

“South Africa’s unemployment rate has continued to increase. This is according to Statistics South Africa’s recently released quarterly labour survey. The unemployment rate increased by 1.4 percentage points from 27.6% in the first quarter of 2019 to 29% in the second quarter of the year.” Source: https: mg.co.za/article/2019-07-30unemployment-rate-at-29-statssa

Using the Philips Curve model, discuss the impact of this unemployment rate against government achieving its macroeconomic objectives of stable inflation rates and low unemployment rates

Answer 1

According to the Phillips curve, there is inverse relationship between unemployment rate and inflation in the short run.

However, one important assumption is of the Phillips curve which is that there has to be full employment in the economy.

We find that the inflation rate in the country is around 2% whereas unemployment rate reached almost 30% in 2019. Why can't the government increase the money supply thereby leading to increase in price level which could bring down the high unemployment rate ?

A close presusal of economic data of South Africa shows that the country has a positive relationship between unemployment rate and inflation due to following reasons:-

( I ) The inflation in South Africa is not driven due to wage prices. The presence of Union has caused wages to be higher than equilibrium wage rate.

( II ) The country's economy is not operating at full employment especially there is under-utilization in sectors such as manufacturing.

( II ) Mismatch between required skills and supplied skilled people is very high.

Therefore, we can say that the Phillips curve in inapplicable in the case of South Africa.