IN THE article “Productivity is rising even as wage share dips, data show” yesterday, Dick Forslund argues that labour productivity in South Africa has risen sharply in recent years. He concludes, among other things, that “trade unions are gaining much too little in their fight for decent work conditions and higher wages”.
Forslund’s argument hinges on the output-per-unit-labour measure of productivity. If a firm produces 100 units using 100 workers, average output per worker is 1 unit (100/100). If, by installing a new machine or adopting a new technology, the firm produces 120 units with 80 workers, retrenching the other 20, average output per worker rises to 1.5 units (120/80), an increase of 50 percent. In this simple example, it is clear that the additional production was achieved, not by workers, but by the introduction of a new machine or technology. This is the labour productivity illusion: attributing to workers what is, in fact, attributable to capital or technology.
In contrast with Forslund’s claims, the Organisation for Economic Co-operation and Development (OECD) defines productivity as “the ratio of a volume measure of output to a volume measure of input”.
As such, labour productivity varies as a function of both other input factors (management, arable land, natural resources, physical capital, information and so on) and the efficiency with which the input factors are used. The US Bureau of Labor Statistics (BLS), which calculates productivity in the US, prefers the “marginal productivity” measure: the change in output that results from changing one of the inputs by one unit, all other factors remaining constant.
An exact statistical procedure for doing so is described on Adcorp’s website. Using the OECD’s and BLS’s preferred methods, South Africa’s labour productivity recently fell to the lowest level in 40 years.
Attributing all production to workers, as Forslund does, is closely connected to the Marxist conception of value. This concept, the labour theory of value, was demolished long before Karl Marx’s writings by one of its early proponents, the 18th century economist David Ricardo, who, writing in his later years, showed that a bottle of wine lying in a cellar increases in value with no additional labour input.
Later, economist John Maynard Keynes dismissed Marx’s Capital as “an obsolete economic textbook which I know to be not only scientifically erroneous but without interest or application to the modern world”. Yet Marx’s ideas are enjoying a surge in popularity: his German publishers reported 10-fold growth in orders since the global financial crisis.
Forslund has an ideological axe to grind.
Productivity, in the sense of making better use of available resources, is a paramount economic goal. It is the only known way of improving living standards, and the various input factors should be applied to this end. But a raft of laws and regulations undermines labour productivity in South Africa. In the 15 years since the Labour Relations Act was introduced, real (after inflation) wages rose by 28.8 percent, which is nearly treble the increase in the preceding 25 years. Per unit of productivity, real wages have risen at an astonishing average rate of 7.6 percent a year – or 200 percent in total – since the act was introduced.
The economy’s capital intensity is rising sharply for the simple reason that the productivity of capital exceeds the productivity of labour, relative to their costs. This (not wavering on trade unions’ part, as Forslund claims) is why labour’s share of national income has fallen to the lowest since reliable records began 50 years ago.
Loane Sharp is the labour economist at Adcorp