The effect of crude oil price changes on sector gross domestic product contribution and employment levels in South Africa

Abstract: Given the overwhelming empirical evidence on the association between the crude oil price changes and economic activity in some countries, it is fitting that a study into the effects of crude oil price shocks on sector employment levels and sector gross domestic product contribution in South Africa was conducted. A Vector Autoregressive Model, utilising a Cholesky decomposition was used in this study to estimate the effects of crude oil price changes on sector gross domestic product contribution and employment levels in South Africa. Seven sectors were studied, namely transport, mining, agriculture, construction, manufacturing, utilities, and trade, for the period Q1 2002 to Q4 2015. The results show that the gross domestic product contribution for the transport, agricultural, and manufacturing sectors does not decline in response to an increase in the oil price. However, the agricultural and manufacturing sectors experience spillover effects that materialise through a decline in employment levels. Employment in the manufacturing sector decreases by 4.44 percent in the long run in response to an oil price increase. Furthermore, employment levels in the agricultural sector decline by 3.46 percent in response to an oil price shock in the short run. Mining and trade are the only two sectors in which both the gross domestic product contribution and employment levels are not directly affected by changes in the oil price. The utilities sector’s employment levels increase at impact in response to an increase in the oil price, suggesting that the sector is likely to experience labour reallocation effects due to an oil price shock. Employment levels in the construction sector decrease in the short run by 5.96 percent, in response to an oil price increase. This study recommends the use of policies such as industrial, fiscal and energy policies to deal with the effects of oil price changes on the South African sectors’ gross domestic product contributions and employment levels.M.Com. (Development Economics