Would South Africa have better employment outcomes if we allowed higher inflation?
It’s a question that resurfaces every few years and has emerged again during parliamentary hearings on the medium-term budget policy statement, which reduced our inflation target.
The suggestion that we should tolerate higher inflation frequently relies on appeals to “stimulate demand” or invokes the Phillips curve theory that inflation and unemployment move in opposite directions. But in South Africa’s real economy this logic breaks down. Our structural challenges mean we don’t conform to textbook models. If anything, our experience suggests that higher inflation would worsen unemployment, not reduce it.
Proponents of higher inflation argue that in the short run, rising inflation reduces real wages if workers don’t immediately adjust their expectations. Firms then hire more because labour becomes relatively cheaper. It’s an elegant theory, but entirely inappropriate for South Africa.
Our unemployment crisis is not caused by momentary dips in demand or temporary wage rigidity. It is a structural problem underpinned by a skills mismatch, low productivity, failing network industries, restrictive product markets and chronically weak gross fixed capital formation.
Tolerating high inflation cannot fix any of these. You cannot inflate your way out of structural unemployment. And the real-world damage runs deeper. Inflation hurts the majority of South African households, which don’t earn formal wages. A total 16-million people rely on social grants or remittances. Millions survive on informal income or precarious work.
For these households, high inflation destroys their purchasing power. When the price of basics rises faster than incomes, demand falls precisely in sectors such as retail and services that should absorb labour. Inflation is therefore a regressive tax on the poor and unemployed, choking the very communities that need jobs most.
Furthermore, our wage-setting institutions adjust quickly to rising inflation. Bargaining councils, public-sector negotiations and cost-of-living adjustments ensure nominal wages chase inflation almost immediately. As a result, real wages do not fall when inflation rises; they merely keep pace. The textbook mechanism that “higher inflation reduces real labour costs” does not operate. Employment does not improve.
Higher inflation means higher interest rates. The Reserve Bank has a constitutional mandate to protect the value of the currency in the interests of balanced and sustainable economic growth. If inflation rises, the Bank must increase interest rates. When interest rates climb, firms delay expansion, cancel hiring plans and postpone new projects.
High inflation therefore acts as an indirect but very real job killer. A glance at our own economic history confirms this. The inflation spikes of 2002, 2008 and 2022 were not followed by employment booms, but by stagnation or rising unemployment. There is not a single modern episode in which higher inflation improved South Africa’s labour market.
What South Africa actually needs is the opposite: an anchor of price stability that protects the incomes of the poor and enables the Reserve Bank to lower interest rates over time. Low and stable inflation is a progrowth, pro-investment and pro-employment stance. It is also a pro-poor choice. It is the foundation for stronger confidence and a condition for sustainable growth.
The medium-term budget was an important affirmation of our commitment to macroeconomic discipline, with debt stabilisation on track alongside a revised inflation target. Stable prices and smaller deficits are not academic choices. They translate directly into better business confidence and lower borrowing costs over time, creating the conditions to raise investment and create jobs.
South Africa does not have a cyclical unemployment problem that responds to inflation nudges. We have a structural unemployment problem that responds to reforms: fixing ports and freight rail, improving the reliability of electricity, breaking down rigid product markets, opening pathways for small businesses and supporting skills development that matches the labour market.
Inflation is therefore not a shortcut to employment. It is a burden on the poor and a barrier to investment. If we want more South Africans to work, we need to choose stability, not shortcuts. In our economy, higher inflation would not lift the jobless out of poverty. It would push them deeper into it.
• Sarupen is deputy finance minister.
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