Labour Productivity, Wages, and Social Welfare: Implications for South Africa’s Budget Deficit and Fiscal Policy

This study investigates the relationship between labour productivity, wages, and social welfare expenditure (SWE) in South Africa, with implications for fiscal sustainability and budget deficits. A theoretical model linking government expenditure, taxation, and labour market dynamics is developed and empirically tested using data from 1994 to 2022. Results from state and private labour market regressions reveal significant evidence of wage–productivity decoupling in the state labour market, where wages are influenced more by institutional factors than productivity growth. Conversely, private sector wages show a positive association with productivity, inflation, and working capital balances. The budget deficit model demonstrates strong alignment with empirical trends, though it underestimates the impact of economic shocks such as COVID-19. Findings suggest that increases in productivity alone will not reduce social welfare dependency in South Africa, given structural inequality, weak labour absorption, and low skills development. Policy implications highlight the need for targeted investment, industrial expansion, and education reform to mitigate rising welfare expenditure and ensure fiscal sustainability.