Is growth in the South African economy profit-led or wage-led?

Abstract

Orientation: This article assessed the impact of functional income distribution on economic growth, and how it can characterise the growth regime as profit-led or wage-led.

Research purpose: This study investigated whether the problem of falling wage share as a percentage of gross domestic product (GDP) may have characterised growth as wage-led or profit-led between 1975 and 2019 in South Africa.

Motivation for the study: Economic growth in South Africa has been low post the 2008 financial crisis and employees complain about insufficient wages.

Research design/approach and method: This article used the Keynesian aggregate demand model and conducted an autoregressive distributed lag (ARDL) approach to assess the presence of a long-run relationship between changes in income distribution and aggregate demand.

Main findings: The study found that the profit rate, rate of capacity utilisation and the real exchange rate have an influence on net exports. Profit rate and rate of capacity utilisation influenced aggregate consumption. Investment was affected by business confidence, profit rate, foreign demand and rate of capacity utilisation. Demand formation was exhilarationist and growth was profit-led. The foreign sector amplified the extent of profit-ledness.

Practical/managerial implications: Government should create policies to reduce inequality in income shares. Institutions should consider reformulating labour dynamics to manage the extent to which the foreign sector amplified the economy to be profit-led.

Contribution/value add: The South African economy is profit-led, inconsistent with developed country literature, which suggests that economies are generally wage-led. The findings highlight the importance of the foreign sector in determining the demand formation and growth regimes in the economy.