SUMMARY
South Africa relative to its peers (upper middle income countries) suffers from high unemployment and sub-optimal economic growth. This study investigates the ‘marginal effects of employment’ with respect to real output and capital in South Africa, using annual data covering the period 1946-2015. It estimates the responsiveness of employment to real output growth and capital, employing the short and long-run dynamic interactions between these variables via the application of the VAR/VECM Johansen (1991) framework. The results show that there exists a statistically significant long-run co-integrating relationship between labour employment and real GDP growth. Marginal employment growth effect is positive; a one per cent increase in GDP tends to increase employment by about one third of one per cent. Employment adjusts consistent with expectations when it overshoots its structural relationship with other variables. However, real output tends to adjust contrary to expectations, implying significant diminishing returns to employment in the economy. Growth in capital impacts positively on output and employment. The study concluded that greater labour market flexibility and higher worker productivity is needed across all sectors of the economy.