DIMINISHING RETURNS - JSE MAGAZINE

DIMINISHING RETURNS

SA’s productivity levels are the lowest they’ve been in half a century. Or are they? The numbers tell a different – and increasingly complex – story, depending on how you look at them

DIMINISHING RETURNS

In August 2012, the JSE-listed human capital management group Adcorp released statistics that indicated SA’s labour productivity was at its lowest level in 46 years. The numbers showed that since 1967, output per worker per unit of capital had fallen from R7 297 to R4 924 a year – a decline of 32.5%. From its peak in 1993, this measure of labour productivity had fallen by 41.2%.

The numbers did not look good. The trouble with numbers, however, is that what they tell you depends on how you look at – and what you do with – them. Productivity SA CEO Bongani Coka is among those who have challenged the interpretation of these reported numbers.

‘South Africa’s productivity is not necessarily at its lowest in 40 years,’ he says. ‘Overall, a forecast for the 2013 data indicates that out of 20 manufacturing subsectors, only seven subsectors demonstrated declining productivity indicator – labour, capital and multifactor productivity – rates.’

Speaking in late September 2014 at the launch of the Productivity statistics report in Midrand, Deputy Minister of Labour Patekile Holomisa said: ‘What comes out very clearly is that South Africa faces a challenge to improve on its competitiveness position and ensure that the improvement translates to improved national productivity.’

Increased national productivity is very vital to our country’s future – as Axel Schimmelpfennig, senior resident representative of the IMF in SA, points out. ‘Labour productivity growth is a key factor to achieve higher living standards, and we see that in countries across the world,’ he says.

‘With labour productivity growth, the economy expands. Firms can pay higher wages and may hire additional employees, bringing down unemployment.’

Coka believes that productivity and competitiveness are interlinked, adding that ‘increased levels of productivity will result in the higher competitiveness of the goods and services produced in a given economy.

‘Through productivity measurement, a nation’s economic performance can be determined, thereby providing or creating clear indicators for areas of improvement,’ he says.

If you believe the numbers, SA has plenty of room for improvement.

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‘Out of 20 manufacturing subsectors, only seven demonstrated declining productivity indicator rates’

BONGANI COKA, CEO, PRODUCTIVITY SA

There’s an old joke that goes: ‘Put 10 different economists in a room and you’ll get 11 different opinions.’ That’s as true in SA economics as it is anywhere else, especially when it comes to measuring productivity.

The easiest and most widely used way to calculate labour productivity is to take the total output produced in a period and divide that by the number of workers (or worker hours). In a July 2013 BusinessReport article, Adcorp labour economist Loane Sharp did the sum: ‘So, for South Africa at present, GDP per worker is R144 625, worked out as R1.963 trillion (GDP for last year expressed in 2005 prices) divided by 13 573 000 (the number of workers for the equivalent period). The equivalent figure for 1960 was R522.6 billion of output and 4 780 841 workers, or an average output per worker of R109 311. Evidently, output per worker increased by 32.3% between 1960 and last year.’ Easy. But wait. Didn’t Adcorp also say that SA’s labour productivity was at its lowest level in 40-odd years?

This is where the thinking can get muddled. Output per worker and labour productivity are two very different things. After all, workers are assisted by machinery, technology, capital and other factors. This is why some economists prefer a different metric to measure labour’s contribution to productivity. Dust off your old economics 101 textbook, and you’ll find the formula for marginal product of labour, which represents the change in output that results from employing an added unit of labour.

‘What is alarming about this method of computation is the result that South Africa’s marginal labour productivity has been lowest in the 2000s, where a 1% increase in the workforce yielded a drop in production of 0.08%,’ writes Sharp. ‘Consider the ramifications: for every extra worker added to the production process, national output currently falls rather than rises.’

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That’s not a number you’ll hear much in conversation with labour unions. And as useful (or scary) as it is, it still doesn’t adequately explain why SA’s productivity levels are down – or what we’re going to do to turn them around.

So what has gone wrong? ‘Similar to other countries’ economics that were shook by the global meltdown, South Africa has not been immune to global economic factors,’ says Coka. ‘Although the tight fiscal policy and exchange control regulations provided some form of cushion for the country, the financial crisis of 2009 and the ballooning rates in 1998 have had an impact over and above other issues. The declining demand for metals such as platinum has also had an impact.

‘Also at the core of the economic bottleneck is the fact that raw materials are generally exported and are imported at a higher price as finished goods and there is minimal beneficiation.’

Holomisa added that, in 2012 and 2013, the electricity, gas and water sector was under pressure – and that this was reflected in the productivity indicators. ‘The situation was underlined especially by the decline in the capital, labour and multifactor productivity indicators,’ he said.

‘Furthermore, the relatively lower growth in compensation of employees in 2013 compared to 2012 in relation to labour input growth, suggests that there was a reduction in the number of highly paid employees.

‘Productivity is everybody’s business. As a country and a nation, we must appreciate the correlation between productivity and competitiveness’

‘This further suggests that the unit labour costs should not be taken at face value, but rather an investigation of the changes in the composition of labour between skilled and semi-skilled should be taken into account. This is yet another area that must be attended to urgently.’

Similarly, SA’s public service is in a process of transformation and in addition, as Edmund Ferreira of Unisa’s Department of Business Management illustrated in his inaugural lecture in October 2013, the public sector is pressured by high expectations from management, as well as from its client – the nation.

‘Expectations are high and the temptation must be resisted to borrow existing ideas and experience from other countries, which might not be appropriate for our situation,’ he said.

‘Even prior to the first democratic election in 1994, structural and administrative culture adjustments to the public service were urgently needed.

‘Although a number of measures have been taken to improve service delivery, the outcomes are varied. A systematic service culture is perhaps still absent.’

Ferreira pointed to other factors, such as the continuing pace of externally imposed change, uncertainties about the amalgamation of different public sectors, and externally imposed contradictions and constraints (like the need to balance budgets while being pressured to not dismiss any employees).

Productivity SA is an entity of the Department of Labour and is tasked with enhancing the country’s commercial productivity and global competitiveness in what Coka calls ‘a concerted bid to boost the economy and create jobs’.

Three key Productivity SA programmes include Turnaround Solutions, which provides technical support to enterprises with the aim of saving jobs, and Workplace Challenge, which is aimed at helping primarily manufacturing companies become more competitive through the adoption of best-operating practices. The third, Productivity Organisational Solutions, focuses on training and measuring productivity as well as the factors that influence it, in order to optimise enterprise resources.

However, as Holomisa said: ‘Productivity is everybody’s business. As a country and a nation, we must appreciate the correlation between productivity and competitiveness. I therefore reiterate the importance of organisations, companies, government departments to instil a culture of productivity, a culture of efficiency at the workplace. Such conduct has far-reaching implications for the good of the economy, for the good of the labour market, for the good of the people of South Africa. Let us all work together to move our country forward.’

In the discussion around SA’s dwindling – or not – productivity levels, it is worth examining how Adcorp got to their figures in the first place.

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The firm admitted at the time that ‘the problem with the output-per-worker definition of labour productivity is that output is not only produced by workers. Other factors of production, such as land, capital and entrepreneurship are omitted from the definition’.

Sharp suggested that a better procedure would be ‘to standardise the output-per-worker measure by the amount of capital used in the production process, which yields output per worker, per unit of capital’.

That’s how they came to the 32.5% decline in output per worker per unit of capital since 1967. And, said Sharp: ‘This measure at least explains why the South African economy’s labour intensity is falling and returns on capital are rising, and why labour’s share of national income is at an all-time low while capital’s share is at an all-time high.’

Combine all those conclusions and you cannot help but come to a startling realisation: capital is working harder than ever, while labour is less productive than it has ever been. And for every extra unit of labour you add, it gets less and less productive.

For overall productivity to increase, we need a fully employed labour force – and, in Holomisa’s words, ‘with the unemployment rate currently hovering at about 25%, the need to increase the competitiveness and productivity of South Africa has never been greater’.

No wonder SA’s productivity stats are, as Coka calls them, a ‘mixed bag’. It is also not surprising that those 10 economists keep coming up with 11 different opinions.

By Will Sinclair
Image: Andreas Eiselen/HSMimages