The analysis of exchange rates and employment has received scant attention in development economics. This is surprising, since there appears to be a number of well-defined transmission channels through which exchange rates impact on employment. In South Africa this is particularly important given the rand's higher volatility relative to other emerging economies. The main focus of this paper is to give an overview of the transmission channels through which exchange rates affect employment and to discuss the standard methodological approach to conceptualising the impact of exchange rates on employment. Given the sector-specific impact of exchange rates which are conditioned by industry characteristics, such as the degree of external orientation, there will always be winners and losers in the face of a currency shock. This means the full impact of exchange rates on employment can only be dealt with in an economy-wide framework. Results from a computable general equilibrium (CGE) model are presented to demonstrate that even in a country with unreliable employment data such as South Africa, one can still analyse exchange rate and employment issues. JEL Classification: F16, E24, F31, J23

There has been some debate on the impact of exchange rate volatility and levels in South Africa. This is a particular concern as South Africa needs to dramatically expand sustainable employment and at the same time raise value-added in its production of goods and services. These are not necessarily complementary objectives for a mineral-exporting economy. Using a computable general equilibrium model, with the appreciation induced by a commodity price boom, this paper analyses the possible impact of an appreciation of the rand on employment. The intention is to identify the impact on both aggregate employment and sectoral output. Although the economy does well as a result of the commodity boom, the results indicate the potential for 'Dutch Disease'-type effects. Almost all traded sectors are negatively affected, while the non-traded sectors experience a boost as a result of the appreciation.

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We examine the economy-wide impact of the child support grant (CSG) on the South African economy using a bottom-up/top-down approach. This allows us to estimate the potential effects on households' welfare and on the economy following a change in the CSG. Three simulations are presented, in simulation 1 the value of the CSG is increased by 20%; in simulation 2 the number of beneficiaries among the eligible children is increased by two million and simulation 3 combines these two. A positive link between the CSG and the probability of participating in the labour market is found. The positive impacts on the labour market, together with the increase in the transfers received by households, results in an increase in their income. Poverty decreases in comparison with the base year for the whole population and for children. Finally, we can conclude that simulation 1 is the most cost effective of the policies.

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