Economists use the term marginal productivity to isolate the specific productivity of one of the factors of production. Isolating the contribution of a particular factor of production is important, since it allows us to gain a sense of the unique contribution that this factor makes in the production process. Labour’s marginal productivity – that is, labour’s unique contribution in the production process, holding constant other factors such as land, capital and innovation – is shown in the figure. The same figure shows the rise in real wages over a similar period. As indicated in the chart, since around 1995, labour productivity has been falling whereas real wages have been rising. The two factors together explain why employment has been falling in the private sector. Between 2001 and 2012, nearly 1 million jobs were lost in the private sector. The overall employment figure in the public and private sectors remained roughly static, for the reason that government employment increased by around 1 million.

Infographic: Two Measures of Labour Productivity

To most people, labour productivity is measured as output per worker, i.e. the total volume of output divided by the total labour input in hours. This is a highly problematic definition, since output is not only produced by labour. Other factors such as capital equipment and machinery, information and other technologies, and entrepreneurship are crucial inputs in the production process. Our definition – output per worker, per unit of capital – goes some way to accounting for the fact that labour and capital are both involved in the production process. As indicated in the chart, output per worker has been rising, not because labour productivity has been rising, but because more capital inputs have been used in the production process. In other words, the economy has become more capital-intensive and less labour-intensive over time. As such, output per worker, per unit of capital, has fallen by 32.5% since official records began in 1967, and by 41.2% since the peak reached in 1993.

Infographic: Labour and Capital Productivity

South Africa’s labour productivity recently fell to a 40-year low. Capital productivity, by contrast, rose to a 50-year high. As a result, labour’s share of national income has fallen from 60.1% to 52.8% over the past 15 years, and capital’s share has correspondingly risen. Productivity as measured here is what economists call “nominal marginal productivity”: it is nominal in the sense that it is not adjusted for inflation; and it is marginal in the sense that it measures the contribution of each production factor (labour, capital, etc.) to output, holding other factors constant. Nominal marginal productivity of labour is an important concept in economics because wage increases for the economy should be equal to it. If wages rise faster than labour productivity growth, employment will fall.