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Masters Theses
Relationship between inflation rate and wage rate before and after inflation targeting periods in South Africa
Author(s): Okosa, Jessica Onyinyechi
Advisor: Prof Kaseeram, Irrshad; Prof Tewari, Devi Datt
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Abstract: The increasing number of trade unions with strong/collective bargaining power in recent times have put pressure on wage rate, resulting in rate rise in South Africa, thereby causing rate rise in inflation from both the supply and demand sides with its attendant output/productivity deterioration. Consequently, this study complements existing literature by investigating the long and short-run linear and nonlinear relationships between wage rate and inflation rate before and after inflation targeting periods in South Africa. in a sample of 170 observations spanning from 1980Q1 to 2022Q1. The study quantitative, anchored on archival design, with the data sourced from the World Development Indicators (WDI) and the South African Reserve Bank (SARB) It employed the linear and the nonlinear autoregressive distributed lag (LARDL & NARDL) estimation techniques in the analysis to test these objectives. The findings made in this study have both short-run and long-run implications. This study found a positive linear and nonlinear relationship between inflation and wage rate in South Africa for the period under investigation. This implied that although both indicators significantly raise each other during the short-run and long run, the magnitude of the impact of inflation on wage rate was higher than that of wage rise on inflation. Therefore, higher rates of inflation caused workers/trade unions to demand for higher wages and not vice versa. Hence, the high inflation rate is more of demand-pull rather than supply/cost-push. This study also found a non-persistent inflation rate in the long-run. This implied that adaptive expectation, rather than rational expectation, is the main driver of economic agents’ price setting behaviour. This assertion was further strengthened by significant positive impact of the log of bank rate on inflation in the short-run and long-run. Moreover, high productivity was found as a strong panacea for rising wage rate and inflation rate, whereas the adoption of inflation targeting from the first quarter of the year 2000 in South Africa emitted no significant impact on the wage-inflation nexus. This was attributed to a credit crunch following the 2007/08 global financial crisis that led to policy failures and, hence, the inability of the monetary policy rate to control wage rate. The negative impact of the cumulative negative changes in wage rate on inflation implies that, over the long-run, negative changes in unit labour costs had a marginally stronger dampening effect on inflation relative to a positive change, which in relative terms has a marginally smaller positive effect. Hence, there was weak evidence of an asymmetric/nonlinear impact of wage rate on inflation rate, and vice versa, in the long-run with no short-run nexus.
This implied that positive and negative changes in the two indicators are more likely to have a trade-off with each other in the long-run than during the short-run. Finally, the findings from the last objective of this study relating to the nature of the relationship between inflation, wage growth and productivity before and after the inflation targeting eras in South Africa revealed that the downward nexus among inflation, wage rate and bank rate during the early 1980s could be attributed to structural transition to quantitative approach to monetary policy in 1985. Moreover, high volatility recorded among productivity, inflation rate and wage rate in 2020 could be attributed to the structural shock of the COVID-19 pandemic. Based on these findings, the study recommended that government should reduce the cost of governance to keep inflation low, improve productivity through market liberalisation and tax holidays, and incentives to firms in order to keep wage rate and inflation rate low. It is also recommended that capital and money markets reform be done in order to make inflation more responsive to monetary aggregates, and financial system be liberated to cushion the effect of credit crunch that might arise from financial crisis. The findings that emerged in this study have both short-run and long-run implications. The short-run implications included rising inflation, high wage differentials among workers and job loses especially among private establishment. the long run implications included policy conflicts structural collapse, institutional failures and high tax liability in the future as a contractionary fiscal policy mechanism to cushion demand pull-inflation
Description: Thesis submitted to the Faculty of Commerce, Administration and Law to fulfil the requirements for the Master of Commerce in Economics at the University of Zululand, South Africa.
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