The left and the unions will not accept their responsibility for the regulations that have protected workers in formal employment. This has led to much-improved employment benefits for a declining minority of the potential workforce and a consequent lack of opportunity for many more to enter formal employment.

Firms in South Africa have adapted to the artificially enhanced costs of hiring workers by using relatively more capital and fewer workers and by organising generally more skilled and often older workers in ways that have enhanced their profitability. This has increased the share going to owners of capital and reduced the share going to workers, because regrettably there are so many fewer of them in the private sector.

They, the Left, seem to argue that it is an arithmetic impossibility and economic exploitation for average wages to rise in real terms and for labour’s share of value added to fall. Clearly it is not only possible, but describes what has happened to the shares of value produced by the formal sector in South Africa. 

Finding work does not make workers with limited skills well off – but keeping them out of work that could, over time, enhance their skills and reputations that might lead to higher real employment benefits, as employers compete for their potentially more valuable services, is to condemn them to permanent poverty and dependence on welfare and or the much lower wages and very little training offered by informal employers.

Surely the overwhelming evidence from South Africa over the past 15 years and more is that there is no magic regulatory wand with which to raise real wages as well as employment opportunities. If only economic life were that easy to manage. It is overtime for the evidence to change these damaging, simple-minded beliefs about how an economy works and so allow potential workers much greater freedom to offer their labour, and employers much greater freedom to hire them on terms they can agree.

Dick Forslund makes so many errors that it is hard to know where to begin a response. The December 19 letter “Labour productivity is up, with real wages stagnant”, refers.

Forslund seems to think that workers bundle together in little co-operatives, dreaming up projects to increase company productivity, and that the resultant profitability accrues entirely to those workers in the form of higher wages. No business operates that way. Not even Karl Marx, who famously did not enter a factory in his lifetime, suggested that workers were entitled to all of the value created by a firm.

Firms undertake all sorts of productivity-enhancing measures, aimed at obtaining greater value from available resources. Profitability, in this sense, is the organising principle of economic life: it signals to firms to scale up some activities and scale down others, and in so doing they maximise the value of the firm for its shareholders.

For example, newspaper editors take incremental, calculated risks in terms of daily content, journalistic perspective, distribution medium, and so on; and they respond to various signals in terms of circulation, advertising, industry awards, and so on; in order to produce outcomes – news currency, variety and depth, in addition to newspaper profitability – which were not usually (at least knowingly) their daily intention.

In the age of managerial capitalism, where shareholders no longer personally direct the activities of the firm, the means to attain increased worker productivity lie with managers, who innovate in the ways that workers are managed and organised. For example, if some managerial innovation leads to factory throughput of 110 rather than 100 units an hour, it is the production line as a whole – not the workers – that is more “productive” (more profitable).

The intention behind the productivity enhancement is not higher wages for workers, but the increased profitability of the firm. Naturally, if the workers acquire additional skills in the process, they become more valuable to other firms, who will bid up their wages, and in this way, managerial capitalism transmits to workers higher incomes and living standards that were not directly its initial aim.

Profits are a reward for value-enhancing innovation. We can get a good sense of how South African firms are performing against this mandate by looking at profits’ share of national income, which has increased from 39.9 percent in 1995 to 47.2 percent in 2011 – an average annual (nominal) increase of 12.1 percent. We can also get a sense of how workers’ incomes have improved over this period: average after-inflation remuneration in the non-agricultural formal sector has increased from R9 378 a month to R12 564 a month – an average annual (nominal) increase of 9.8 percent.

As these figures show, the strength of capitalism is that it is not a zero-sum game: gains for shareholders do not occur at the expense of workers, for in fact it usually occurs that profits and wages rise in tandem.

Problems arise when laws and regulations affect the way that managers and workers operate. For example, dismissal protections for non-performing workers reduce managers’ ability to adopt productivity-improving initiatives. Enforced collective bargaining drives wages above their productivity-related level.

The net effect of these laws is to reduce labour productivity and raise labour costs, leading firms to seek alternatives to labour, mostly in the form of capital equipment and technology. Workers’ share of national income in South Africa has fallen not because, as Forslund claims, workers’ wages have been falling relative to productivity, but because employment has been falling relative to wages.

There are, unfortunately, several statistical measures of productivity. Labour’s marginal productivity (which I favour) strips out what is rightly attributable to other input factors, attributing to labour what is uniquely labour’s.

The conventional measure of labour productivity goes further, attributing the sum of all input factors’ productivity to labour alone. And total productivity goes even further, attributing to labour not only the individual but also the conjoint effects of the various input factors. Forslund is determined to embrace the most expansive definition of labour productivity, in order to argue that trade unions should be pushing for yet higher wage escalations.

This is a case of hammering a round stick into a bottomless pit. Paying over to workers what is rightly attributable to shareholders, managers, landlords, the other providers of capital, and other input factors is a recipe for economic catastrophe.