Impact analysis of disaggregated government spending shocks on unemployment: evidence from South Africa.

Abstract

This study is motivated by the need to address the persistently high unemployment rate in South Africa. Empirical studies have shown that societies with high levels of unemployment are associated with challenges of poverty, inequality, crime rates, violence, political instability including mental and psychological health issues among others. This study examined the influence of disaggregated government spending on unemployment in South Africa using data spanning from 1990 to 2021. The linkage between unemployment and components of government spending and other control variables was therefore analysed through the utilisation of the autoregressive distributed lag (ARDL) technique. The ARDL cointegration test outcome suggested the existence of a long run relationship between unemployment and the variables under study. In addition, the error correction model revealed a negative and statistically significant speed of adjustment coefficient of -0.98 implying that 98 percent of the deviation in unemployment from its long run equilibrium level is corrected within a year. The study further revealed that government spending on economic services investments and social protection are essential for decreasing unemployment, while contrary to expectation, spending on health was found to be positively associated with unemployment. Further examination of results indicated that the influence of other various government expenditure components on unemployment were statistically insignificant despite carrying the expected signs. For instance, government spending on mining, manufacturing, and construction despite exhibiting a negative association with unemployment, turned out to be statistically insignificant. Similar findings of a negative but insignificant link with unemployment were reported for government spending on fuel and energy. The government spending components which emerged as more beneficial in alleviating unemployment in South Africa were economics services investment and social protection. Therefore, this study recommends that government expenditure focus more on those component areas that are vital for lessening unemployment.