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PETER Aling is an analyst at Prophet Analytics.
SUMMIT TV: Third-quarter South African labour productivity wasn’t good and the public service sector was worse. What does this say about the state of the economy? Before we get into the nitty-gritty, can you explain how your report was formulated?
PETER ALING: We took a different approach to measuring labour productivity from the traditional method used by the Reserve Bank. The traditional measure takes all outputs and divides that by the number of people employed. Output is not only attributable to labour — there is capital, technology and many other reasons why output might grow.
To take growing output over time and divide it only by employment is a very poor measure of labour productivity. To measure effectively one needs to strip out the effects of capital, infrastructure, global economic growth and technology. What you are left with is the productivity that is related only to people.
STV: What is the difference between productivity and labour productivity? Does that alter the way we should view these numbers?
PA: Definitely. Productivity is output and how effectively firms are generating output. It’s different from profitability because profitability is driven by economic factors such as the cycle, whereas productivity is arranging the inputs in the productive function that allows the highest levels of output. That includes technology, capital and people.
STV: Let’s go into the details of this survey. Interestingly, labour productivity in the private sector is 450% higher. What is the public sector doing wrong?
PA: While private sector productivity is 450% higher than the public sector, it’s not good — there is a labour productivity problem in South Africa in general. That’s not to say it is only a productivity problem — firms are diverting resources away from people into other productive enterprises, predominantly technology and capital.
There are many reasons but probably the biggest difference between the public and private sectors is that at least within the private sector there is an alignment of economic objectives between profitability and productivity, whereas in government that is not true. Profitability of government or tax revenues is actually driven by the productivity of the private sector, which means the people employed by government don’t actually have to be as productive to ensure that their positions are retained. This is why we see continuing government employment expansion despite the lack of service delivery.
STV: What are some of the major factors that are driving productivity in South Africa? What should the government be doing?
PA: We’ve discussed the usual suspects in many interviews. These include a lack of skills in the South African labour force, a lack of work ethic, stringent regulations and a high tax burden. Among 46 African economies, South Africa ranks 44th in terms of how much gross domestic product is appropriated by the government as tax. It’s about looking at those impediments and arranging those resources in a productive manner.
STV: When you talk about a work ethic, who is responsible? The individual or a company?
PA: This is a problem across the board in the public and in the private sector. There is a misalignment between the incentives and outputs. To a large extent, workers are paid for their time rather than the value they add to the organisation.
What you will notice when we go into company rankings for JSE-listed companies, those that have high productivity such as RMB and Investec generate in excess of R100,000 in free cash flow per worker per year. Once we’ve stripped out the capital, they have complex incentive schemes so their employees reap the benefits of the additional productivity they drive into those organisations.
With organisations that appear at the bottom of the list, such as Wesizwe Platinum and Lonrho among others, there might be a misalignment between the remuneration structures and the productivity the workers are expected to return.
A more pervasive change, where labour relations are going to prevent this, around the way people are remunerated will have a huge impact. That includes the government — rather than paying people to arrive at 7am and leave at 3pm or 4pm, pay them per house built, claim processed, account opened or tax revenues collected. That is one of the reasons the South African Revenue Service is one of the few high-functioning areas — it has a bottom line that is linked to efficiency. That is not true for many other areas in the public sector.
STV: Going back to that R100,000 in cash flow per employee in these top companies, what was the average?
PA: In only 60 of the 100 companies we evaluated we saw positive returns to labour — and some of them, despite being positive, were not necessarily good because they weren’t exceeding the cost of that labour. If we talk about the median, on average labour productivity in South Africa is declining and has been since the 1960s, and we’ve seen companies diverting their resources into capital and technology. So the South African economy is steaming along but labour is getting a smaller and smaller share of the rewards. The share labour is getting dropped from 60.1% in 1995 to 52.8% last year.
STV: How do we compare with other countries?
PA: South Africa has very poor labour productivity — this is why we are failing to compete on the global scene. Countries such as China and India have much higher labour productivity and lower minimum wages. We just can’t compete. One of the things the ranking list indicates for both shareholders and investors is whether the companies will be able to compete globally, because if productivity doesn’t cover costs from a South African national perspective, we are not going to be able to compete globally.
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