Labour, capital and productivity: Important growth determinants
By Christo Luüs
EcoQuant

ebilitating strikes have crippled many sectors of the South African economy in recent months. One of the most severe was the strike by more than a million government workers which lasted for more than three weeks during August and September 2010.

Workers generally claimed to be dissatisfied with the pay rise offered by government as well as with certain allowances. However, some observers have argued that the political motivation for the rather violent strike was as strong – or maybe even stronger – than the financial reasons cited by union members and bosses.

Although it is quite clear to see that motor vehicle manufacturers, for example, stand to incur losses due to striking workers – mainly because export orders cannot be fulfilled – it is not all that clear what the economic cost of a strike in the public sector could be.

Even though it is difficult to quantify the short-term economic costs of prolonged strikes by government workers, there is undoubtedly a direct link between economic growth and the extent of capital utilistation, the number of workers employed, and productivity levels.

From the data and graphs it is clear that the government has been a major job creator in the economy over the past number of decades. By 2009, the general government sector had increased its employment level by a total of 1,129 million employees since 1970, while the rest of the economy had expanded its formal employment by only 1,786 million employees.

However, since the bulk of the job creation in Government was apparently in the lower skilled categories, real remuneration per worker had not risen to the same extent as in the rest of the economy. Thus, over the past four years, real remuneration per worker in the total economy had increased by 3,1% p.a., which was higher than in any preceding period since 1970 and also much higher than the figure of 0,3% p.a. for General Government during 2005-2009. This real increase occurred despite the fact that 2008 and 2009 saw one of the most severe recessions since the Second World War.

The much higher levels of employment in government relative to the private sector, nevertheless did very little to lift productivity or indeed total production of general government. The gross value added (GVA) contribution of General Government to total GVA amounted to 16,2% during the 1970s, but during 2005-2009, had shrank to only 14,7% of total GVA.

Labour productivity growth in the economy had shown a more significant increase during the 2000s than during the three preceding decades, but labour productivity gains in General Government remained negligible during the period 2000-2009.

Capital productivity growth in the total economy amounted to 0,6% p.a. during the 1990s and increased to 2,2% p.a. during 2000-2004, but again become negative to the tune of -0,9% p.a. during the period 2005-2009. In contrast, capital productivity growth of General Government has remained at or below 0% since the 1990s.

Consequently, multifactor productivity growth (i.e. the growth in gross value added which cannot be explained by the growth in total factor input) by General Government has also been below that of the total economy for all periods since 1970, showing that Government is generally speaking not very good at creating growth through productivity enhancements.

South African taxpayers have indeed been paying more and more but have been getting less and less from government. Strikes are but another issue that will cause the economy’s productivity levels to decline – thus diminishing the country’s growth potential. This vicious circle will be further reinforced by the tendency to substitute more capital intensive production methods for labour. This will on the one hand increase unemployment, but on the other hand benefit production and service levels. After all, machines cannot strike, deliberately damage property or harm innocent people.