Fire, don’t hire

What should strike any visitor to Switzerland, as I realised on a recent trip, is the extremely high capital-labour ratio of the country. Road sweepers don’t use brooms (as they do in South Africa), they use sweeper cars (think of golf carts on steroids), allowing those workers to be far more productive and, consequently, the government to employ fewer of them. This is true throughout the economy: there are fewer service staff in shops; fewer waiters in restaurants; fewer workers in factories. (But, importantly, more shops, restaurants and factories because these firms are competitive.)

Contrast this with the focus in South Africa on employment. Everyone from politicians and academics, to journalists and even trade unionists emphasise the need to create more jobs. But while job creation is an obvious necessity given South Africa’s highly unequal income distribution, the irony is that it is not achieved through focusing on job creation. No. Development is about producing more stuff with the same number of inputs, or using fewer inputs to produce the same amount of output (stuff). In short: it’s about improving productivity. And labour (i.e. jobs) is an input into producing the various outputs of the country: food on farms, clothing in small factory ships, vehicles in large assembly plants, and services in the financial, tourism or construction industries. So, in truth, if we want to develop, we need to focus on producing more stuff with fewer people, and should spend less time on thinking of creative ways to increase our inputs.

Instead of focusing on jobs, we should be focusing on adding more capital to people. Giving workers skills (human capital) adds to their ability to produce more with less. That is where an adequate education system is crucial, an issue which has received a lot of attention in South Africa. My take is that the particularly poor supply of education is only half the story. Perhaps South Africans don’t want a good education, because there is little need for it. Why would you want to learn anything if you believe that the best you can become is an unskilled labourer on a mine? Or maybe education is not even that important. (I can see Nic Spaull choking in his morning coffee.) Huge investments in education in several African countries after independence did little to accelerate economic growth.

When labour is scarce, it not only increases the price paid for labour, but also the incentive to innovate. This is something even Adam Smith noted when he said that no slave society has ever invented anything, simply because there was no need to: slaves were always available to do the job. But invention is the key to making a sustained improvement in productivity levels (i.e. to continuously do more with less): the Geneva road sweeper could never be so productive without the improvements in road sweeper technology that has eventually created the sweeper car. If South African firms are so focused on employing more people, there will be little incentive to innovate (both in technology and processes) which will allow the workers that already work there to be more productive. Our firms will not be competitive if they simply hire more workers when production increases.

So what about the 40% unemployed? Firstly, shedding jobs in one industry will make that industry more productive, which will also make it more competitive in international markets. This will allow the industry to grow, and more workers will be needed. But job shedding in one industry should also reduce the wage rate in other industries as those workers move. This would reduce wages in the rest of the economy, which will allow the rest of the economy to be more productive and competitive, creating a virtuous cycle. But, of course, wages don’t really fall where trade unions can collectively bargain against it. So, instead, some workers go unemployed, 40% of the South African labour force, to be exact.

Development is about making people better off. This is done by producing more stuff per worker than before. But if all of society’s focus is on creating jobs, rather than improving productivity, we will see this ratio of stuff per worker declining, which will only harm South Africa’s competitiveness and long-run development potential. If we’d like to be as rich as Switzerland, we should shift our focus from employing more people, to making those that are employed more productive.