SETP No. 14 The Economic Value of Incremental Employment in the ...

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2 Theoretical Foundations 2.1 Every choice involves a cost. The choice of labour-based methods over equipment-based methods are not just choices of technique and location but also of who bears the socio economic benefits, who bears the costs and the relative magnitude of these differences. 2.2 The poor and unemployed will benefit from a move to labour-based methods in construction. The households who bear the initial burden of a switch from equipment-based methods are the owners of equipment, drivers, mechanics and so on. Compounding these costs in South Africa is the fact that that there is domestic producer of construction equipment and vehicles. A fall in local production will have the usual multiplier effects on, for example, Atlantic Diesel Engines. Even were a machine is fully imported the actual operation generates local incomes and this portion increases as the capital cost of imported equipment is amortised. 2.3 The economic issues focused on in the terms of reference address three main areas in economics – multiplier analysis, gains from trade and cost reduction through improved productivity. 2.4 It can be shown in the discipline of economics that there are efficiency and welfare gains to be had by people trading with each other and by nations trading with each other. People and nations should seek out and maximise their comparative advantage. 2.5 Hence, if it can be shown that equipment-based construction is simply cheaper than labour-based construction then national welfare gains and comparative advantage are reduced by forcing labour-based construction. The people working on the project receive the benefits. The additional costs are (in this case) borne by the taxpayer. 2.6 Economics also recognises that comparative advantages are not static but change and evolve over time. Many economists would suggest that this process is best left to the market. Policy makers, on the other hand, faced with unemployment and poverty will wish to be proactive. At the heart of the policy decision is the need to search for a change in comparative advantage such that improved future welfare will outweigh the immediate loss of welfare by reducing the gains from trade. 2.7 Such issues are further complicated by the fact that an important economic objective in South Africa is a more equal distribution of income. Hence it may be argued that a financial premium on labour-based projects is a corrective mechanism for unbalanced standards of living. Capital intensive projects deny poor people the opportunity to participate meaningfully in the economy. Labourbased methods generate such opportunities. 2.8 In contrast to gains from trade and long term economic policy, multiplier analysis is more short term in nature. It is well known that multipliers only operate when there is excess industrial capacity. Any increase in demand when industries are at full capacity simply results in an immediate increase in imports. In the longer term this increased demand, if it is sustained, may result in increased production capacity but this depends on comparative advantage. 3
3 A Labour Focussed Profile of the Construction Industry 3.1 This section of the report focuses on the construction industry with the objective of determining a profile of actual salaries and wages. This is clearly the starting point of the study as wages determine the cost differential between labour-based and equipment-based construction and the magnitude of the associated macro economic impact. 3.2 Depth is given to this profile by identifying wage differentials across the country, by occupation and by size of firm and by comparing construction wages to those in manufacturing. 3.3 It will be shown that the construction industry is a small and (currently) declining industry. Not only has output fallen but so too have real wages. Some types of wage measures were easy to determine. Other proved to be less so. Determining wages by occupation by location proved particularly difficult. Contribution to Gross Domestic Product 3.4 The construction industry plays a small role in the generation of overall economic activity. In addition this contribution has declined consistently since the early 1980s. (See Figures 3.1 and Table 3.1) In 1981 the construction industry generated GDP to the value of R10 billion (1990 values). This was large enough to contribute 4.3% to overall GDP. By 1998 the real value of contribution to GDP had decreased to R7.6 billion and contributed only 2.7% to overall GDP. Figure 3-1 Product by Kind of Economic Sectoral composition of South African GDP 300,000 250,000 Rm constant 1990 values 200,000 150,000 100,000 General government Community services Financial services Transport & communication Trade Construction Electicity, gas & water Manufacturing Mining Agriculture 50,000 - 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 4
Page 1 and 2: SETP No. 14 The Economic Value of I
Page 3 and 4: Copyright © International Labour O
Page 6 and 7: Table of Contents PREFACE .........
Page 8: List of Abbreviations CBPWP GDP ILO
Page 12 and 13: Structure of the Report This report
Page 14: 8. It is shown in the forth area of
Page 17: 1.8 In order to achieve this object
Page 21 and 22: Figure 3-2 Employment in the Constr
Page 23 and 24: construction. Real wages are higher
Page 25 and 26: Table 3-3 Construction industry Ave
Page 27 and 28: Figure 3-7 1997 October Household S
Page 29 and 30: 3.23 There are four possible reason
Page 31 and 32: Figure 3-8 Number of persons by inc
Page 33 and 34: 3.35 Estimates of average provincia
Page 35 and 36: 3.41 Table 3.11 reports on the prov
Page 37 and 38: 3.45 An attempt was made to verify
Page 39 and 40: Summary 3.50 The construction indus
Page 41 and 42: A profile of income and expenditure
Page 43 and 44: Figure 4-1 Percentage of expenditur
Page 45 and 46: Table 4-3 Expenditure increases for
Page 47 and 48: Table 4-5 Expenditure increases for
Page 49 and 50: 4.18 Here we find that grain mill p
Page 51 and 52: • Labour and capital are in unlim
Page 53 and 54: Figure 5-1 Schematics of the Mechan
Page 55 and 56: slightly higher additional income a
Page 57 and 58: Table 5-9 Indirect job creation Num
Page 59 and 60: 6 The Macro Economic Impact of the
Page 61 and 62: Standard Industrial Classification
Page 63 and 64: Table 6-6 Macro economic impact of
Page 65 and 66: Figure 7-2 Cost of Gravel Road Cons
Page 67 and 68: • When adverse soil or other cond
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Table 7-5 Capital cost amortisation
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Table 7-8 Local and Import costs of
Page 73 and 74:
• In the first five years of oper
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7.41 Table 7.4 is sourced from Tabl
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8.10 Second, the analysis did not t
Page 79 and 80:
References Bulmer-Thomas, V. (1982)
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practical feasibility alone, labour
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domestic industry to set against th
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