Johan Fourie's blog

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Fire, don’t hire

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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.

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Written by Johan Fourie

September 14, 2012 at 00:03

7 Responses

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  1. […] at efficient levels: just consider the massive unemployment (which I’ve written about before), estimated to be between 20-40%. With all these unemployed workers, we could produce more mining […]

  2. […] main lesson, as I’ve mentioned before, is that long-run growth happens on the supply-side, i.e. by improving productivity: Economic […]

  3. Hey Johan, thanks for the great blog. Haven’t commented on anything before but thought this blog post was more than interesting enough to start…
    Unemployment is perhaps the biggest obstacle to a prosperous and socially cohesive future for the country, which is why it is certainly a bit out there to say ‘fire, don’t hire’! Don’t think that’ll go down too well with policymakers or the broad-based 40% of those in the working age group without an income. You’re right that we need to produce more, but what about producing more with the same or more amount of people rather than with less? If labourers are more productive and get paid an increase in wages that is less than the increase in productivity then firms will be more profitable and hopefully hire more labour. This doesn’t look possible with 14% wage increases here and there but I assume that’s why Nic is trying to improve productivity by more, creating a strong case for skills development at all stages in the lifecycle.
    Increasing productivity through capital alone may not be viable for South African firms where labour costs are still low in relation to capital. In Switzerland, where the unemployment rate is 2.9%, wages for unskilled labour are considerably higher than in SA so the costs of hiring five expensive labourers to clean the streets may be more expensive over a certain period than paying for machinery. In SA the costs of importing specialist equipment for the role may be exorbitant compared to hiring five people over the same period.
    The argument does raise interesting questions – what should the level of the capital stock be in SA to achieve potential output (golden-rule)? Is investment (at 17% of GDP) sufficient (or excessive) in order to get to the optimal level? If firing people implies the other employees will be more productive does that mean firms were originally not acting efficiently? Would firms not be more efficient with less excess labour after a downturn as they need to streamline to get through the period of decreased profits? All very interesting and a good thought-provoking piece, thanks for the posts!

    Axie

    September 22, 2012 at 10:55

  4. And if you are interested in some research on the contribution of cognitive skills to economic growth, see here: Hanushek, E., & Woessmann, L. (2008). The Role of Cognitive Skills in Economic Development. Stanford Institute for Economic Policy Research Working Paper No. 07-34. (http://nicspaull.files.wordpress.com/2011/04/hanushek-woessmann-2008-the-role-of-cognitive-sk.pdf)

    Nic Spaull

    September 14, 2012 at 10:55

  5. Having finally got around to reading your post, I find myself sitting on every possible position I could hold: wholly agreeing, partially agreeing, and wholly disagreeing. But mostly the latter two. Before addressing the blasphemous accusations that education “does not matter”. Let’s play around a bit with some of the other things you mention, or more accurately don’t mention. Where is the political process in your discussion? We don’t live in an autocracy where government gets to make unanimous decisions about what’s best for the people and the best way of getting there. There’s an electorate, special interests, an elite and so on. where is the discussion of the real world political economy of South Africa? The dirty, messy but beautiful thing we call democracy? While what you are saying (basically flexify the labour market and focus on creating and improving business rather than creating jobs) makes perfect sense and is almost certainly true, we don’t live in an abstract world where letting wages fall would actually be tolerated by the powers that be (especially the unions, but also the SACP). Should the ANC steam-roll over the desires of the electorate? And even if it should (and perhaps it should) it won’t – that’s not how politics works. It should be fairly evident by now that we don’t have a bunch of philosopher kings in power, but (like everywhere else in the world) a power-hungry, greedy, self-interested elite. This is a democracy – we couldn’t have it any other way! Moving on to some of the other issues – focusing on educational expenditure and concluding that it hasn’t had any result (looking at African countries post-independence) does not in any way mean that education is not important, only that the spending did not translate into the desired outcomes. Does McDonalds focus on how much it spends per year or on profits (which is a function of outputs and process)? And what about adding more capital to people? Do we staple it to their backs and hope this increases their productivity? Something that is pretty obvious from experience and the literature is that capital intensification requires a (more) skilled labor force than manual labor. It is a different discussion as to where these workers should acquire the skills needed (formal learning or on the job training with certification) but the fact remains that they need this additional skill from somewhere. Yes we need to reform our system of vocational training and make it more attuned to the needs of industry, but we do need additional training, skilling, and education. “Perhaps South Africans don’t want a good education, because there is little need for it.”. Um, how do I say this. NO! That simply isn’t true. Perhaps South Africans don’t want more education or a matric because there is little need for it – yes maybe, but current consensus is that there is need/demand/desire for QUALITY education from QUALITY institutions. As Hendrik et al have shown, graduate (degreed) unemployment is a much exaggerated problem. But I need to get back to my thesis proposal now, but let’s talk about this is person sometime – it will make for an interesting discussion. I will be the one pointing to the “Utopia” sign hanging above your head, and you will be the one banging the theoretical drum. 🙂

    Nic Spaull

    September 14, 2012 at 10:52

    • Hey Nic. Glad you liked it. 😉

      By the way, I don’t find my reference to education “does not matter”. Here’s my quote: “Or maybe education is not even that important.” I think they mean two different things.

      But I’d be happy to refund your morning coffee.

      Johan Fourie

      September 14, 2012 at 16:20

  6. To be more exact than exact, 25% and not 40%… Or about 8%, say, if you go with via the grapevine figures from Adcorp.

    dietervf

    September 14, 2012 at 00:49


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