Dadam, VincentViegi, Nicola2024-01-292024-01-292024-09Dadam, V. & Viegi, N. (2024) Investigating unemployment hysteresis in South Africa. South African Journal of Economics, 92(3), 331–353. Available from: https://doi.org/10.1111/saje.12366.0038-2280 (print)1813-6982 (online)10.1111/saje.12366http://hdl.handle.net/2263/94127This paper investigates hysteresis in South Africa's unemployment. First, we test the presence of hysteresis in unemployment using traditional stationarity tests and non-linear transformation methods to identify two further characteristics of hysteresis, namely, remanence and selective memory. In the second part of the paper, we estimate a simple insider–outsider model using a Bayesian vector autoregression methodology to identify the shocks driving unemployment dynamics. The main finding is that mark-up shocks and negative productivity shocks are the main drivers of unemployment, with demand shocks playing a secondary role. Nominal wages are not responsive to real shocks and are an important component of inflation. These results point to the difficulty of absorbing the current level of unemployment without a significant increase in the flexibility of goods and labour markets. At the same time, the evidence suggests that, if reforms are being implemented, demand policies can play a significant role in improving employment and growth, reversing the structural unemployment evident in the data.en© 2024 The Authors. South African Journal of Economics published by John Wiley & Sons Ltd on behalf of Economic Society of South Africa. This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License.UnemploymentNominal wagesMark-upInsider–outsider dynamicsHysteresisSDG-08: Decent work and economic growthArticle