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

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7.35 The single, inescapable fact that becomes clear from this comparison is that labour-based construction (in the form that it has been investigated in this report) has a more beneficial macro economic impact than does equipment-based construction (in the form of a 48% imported component wheeled loader). Cost premiums 7.36 The terms of reference requested that the investigation explore potential cost premiums that might be attached to labour-based construction should we find (as we have) that the macro economic effects of labour-based construction exceed those of equipment-based construction. 7.37 Bearing in mind the cautions and reservations expressed in chapter 2 – theoretical foundations – we calculate cost premiums based on the pure macro economic effect – the contribution to GDP - of labour versus equipment-based construction techniques. These are reported in Table 7.13. 7.38 For a wheeled loader that has a 71% imported component where the capital value is amortised over five years a wage premium of 56% is estimated. In other words there can be cost differences of up to 56% between equipment and labourbased construction for the macro economic effects to indicate that labour-based construction is preferable to equipment-based. For a wheeled loader that has a 48% imported component the wage premium is calculated at 32%. 7.39 However when the capital value of the wheeled loader has been amortised the calculated wage premium falls to 4% in both cases. Table 7-13 Labour Based Wage Premuim due to differential macro economic effects Contribution Wage premium to GDP Labour based construction 386,919 Wheeled loader 71% import, first five years 248,803 56% Wheeled loader 71% import, after five years 373,672 4% Wheeled loader 48% import, first five years 292,280 32% Wheeled loader 48% import, after five years 373,672 4% 7.40 A second method of calculating a wage premium was undertaken based directly on the import component of wheeled loaders and focussed on project specific costs rather than on the overall macro economic effects. This approach takes its starting point from the notion that spending on imports in spending that is ‘lost’ to the country. If this point is accepted then it follows that there can be a wage premium equal to the difference between actual operating costs and import imputed operating costs. The results to this exercise are reported in Table 7.14. 59
7.41 Table 7.4 is sourced from Tables 7.4 and 7.9 and indicates the cost differential that might be applied to labour for differing ground conditions. Hence on soft ground this cost premium can be as high as 36%, in average conditions 30% and in difficult terrain 24%. Table 7-14 Cost differentials between operating cost and implicit local content cost Costs per m 3 for a 10 ton wheeled loader with 1.9 m 3 bucket with 48% import component Actual cost Implicit local content cost Cost differential Soft conditions 5.0 9.2 36% Average conditions 6.0 11.0 30% Difficult conditions 7.5 13.8 24% Conclusion 7.42 It has been shown that the macro economic effects of a certain labour-based construction operation are greater than those of equipment-based construction. A case can therefore be made for a financial premium for the substitution of labour for equipment. 7.43 These results are sensitive to the imported component of locally manufactured construction equipment. The factor that most effects size of the financial premium is the degree to which the capital cost of the equipment has been amortised. Comparing the macro economic effect of labour against new earth moving equipment with a 71% imported component indicates that a labour premium of over 50% is justified. However once the capital cost is fully amortised then this premium falls to 4%. Similarly comparing labour to a machine with 48% import component calls for a 32% labour premium when the machine is new but again only 4% when fully amortised. 7.44 An alternative approach that looks at the direct cost of labour and equipment – rather than the macro economic effects – concludes that under certain conditions labour can compete directly with equipment and result in no cost premium. However as ground conditions deteriorate the cost premium between labour and equipment opens rapidly. These calculations are based on fixed estimates for labour productivity. The reality of labour-based projects is that labour productivity rates can be improved after training over the duration of the programme. 7.45 Alternatively, it can be shown that if we view the import component of locally manufactured earth moving equipment as ‘lost’ expenditure (lost to the country) then labour can compete financially with equipment under a much greater range of physical conditions and wages. This methodology yields a cost premium of 36% in soft conditions falling to 24% in difficult conditions. 60
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SETP No. 14 The Economic Value of I
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Copyright © International Labour O
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Table of Contents PREFACE .........
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List of Abbreviations CBPWP GDP ILO
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Structure of the Report This report
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8. It is shown in the forth area of
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1.8 In order to achieve this object
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3 A Labour Focussed Profile of the
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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
Page 69 and 70: Table 7-5 Capital cost amortisation
Page 71 and 72: Table 7-8 Local and Import costs of
Page 73: • In the first five years of oper
Page 77 and 78: 8.10 Second, the analysis did not t
Page 79 and 80: References Bulmer-Thomas, V. (1982)
Page 81 and 82: practical feasibility alone, labour
Page 83 and 84: domestic industry to set against th
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