The unemployment problem has most likely been caused by the decrease in South Africa’s inflation rate. According to Gumede, in the year 2018, the nation’s inflation dropped significantly in what would be considered to the greatest drop in the last six years. The banks of South Africa left the interest rates unchanged since a drop in the inflation rate should lead to a reduction in the interest rate which is one of the other factors that affect the inflation rate.
The two variables, inflation, and unemployment, have an inverse relationship such that an increase in one factor leads to a decrease in the other and vice versa. The typical consumers in the economy are the ones who are affected since they are deprived of income due to lack of employment. The inflation and unemployment changes have been summarized in the figure shown below:
The diagram above shows a decrease in the inflation rate from I1 to I2. The inflation curve, therefore, shifts downwards from inflation curve 1 to inflation curve 2. This, in turn, increases the unemployment rate from U1 to U2. The diagram also suggests that the unemployment rate will continue to increase as long as the inflation rate continues to drop until other factors become limiting factors since the unemployment rate can only drop to a maximum level.
The unemployment problem can best be solved by increasing the inflation rate. After inflation increases, the government will try to decrease the aggregate demand of South Africa’s economy; the consumer spending increases. This will cause unemployment levels to decrease. Also, if the unemployment levels do not decrease, the government will try to maintain it at its natural level. This information has been summarized in the figure below.
The diagram above shows the effects of increasing the inflation rate. The rate changes from I1 to I2. The effects of the rise in the inflation rate are the decrease in the unemployment rate which shifts from U1 to U2.
The solution shown above would be a short-term solution. This would stabilize South Africa’s economy for a while before other solutions are created. However, in the long run, the inflation rate cannot keep on raising since the cost of living would be too high. The prices of goods and services would increase to a point that would cause an imbalance in the environment since the consumers would now demand higher wages to afford their consumer spending.
Another immediate solution to the unemployment problem would be the creation of new jobs. The government of South Africa could create more working opportunities for its citizens. This includes, but not limited to, initiation of new projects and encouraging foreign companies to initiate their business in the nation which would ultimately create more employment opportunities. The government could also increase the money supply in the economy. More money means that people could now use it to invest in income-generating opportunities.