Our Research posts are about the latest academic research being done in the School of Economics. This week:
HUMAN CAPITAL CONSTRAINTS IN SOUTH AFRICAN MANUFACTURING: A FIRM-LEVEL ANALYSIS
This study examines human capital constraints in the South African economy, and the austerity of these constraints on firms in the country. The two key human capital constraints explored in this article are the inadequately educated workforce and labour market distortions. Regression analysis was applied to examine determinants of increased labour productivity in manufacturing firms. Education and labour market distortions were found to have a varying influence on output per worker. Principal Component Analysis (PCA) of the explanatory variables achieved similar results. This study found that the highest percentage of the total variance is explained by latent variables that incorporate education, training, compensation, region and Sector Education Training Authority (SETA) support and effectiveness.
Since 1998 government has shown a renewed commitment to improve human capital in South Africa. Investment in education has since received more funding than any other function in government (National Treasury 1998-2010). Recent Global Competitiveness Reports reveal, however, that an inadequately educated workforce and restrictive labour regulations are the biggest threats to South Africa’s competitiveness (Schwab, Porter & Lopez-Claros 2006, 334). Fedderke (2006, 26) also states that in South Africa, human capital accumulation contributes less towards economic growth than several other countries, and that the lack of quality education plays a major role in this phenomenon.
Human capital constraints are aspects of human capital that limit the productivity and effectiveness of the workforce in the South African economy. The study found that an inadequately educated workforce and restrictive labour regulations are two major human capital constraints. Empirical evidence indicates that a positive relationship between educational attainment and output per worker and therefore productivity exists. Managers with higher levels of education achieved higher levels of output per worker from their labour force. The study also found that the existence of training programmes and the South African Sector Education and Training Authority support (SETA) had insignificant influence on output levels among firms in the survey. SETA support was also shown to have minimal effect – neither effective nor ineffective influence on firms in the survey. Small and medium-sized firms also experienced very little SETA support compared to large firms.
In the Global Competitiveness Report, the World Economic Forum describes South African labour regulations as restrictive and states that formal sector employment is over-protected. This study did not find significant evidence that suggests that labour regulations have an influence on the level of output among manufacturing firms in the survey, however. Other labour market distortions also exist in the South African economy, such as high levels of unemployment, an over-supply of semi-skilled production workers and a concentration of industries and firms that are location biased. Firms situated in the city of Johannesburg were shown to have the highest output per worker.
For South Africa to achieve higher levels of growth and output, a new approach to human capital development is needed. Recent initiatives to develop human capital in South Africa have proven to be unsuccessful. Government initiatives as well as labour unions are more focussed on the redistribution of wealth and improved working conditions than on increased competitiveness, efficiency and productivity. This leads to a decreasing marginal productivity as employment increases.
Results from a Principal Component Analysis (PCA) revealed that the explanatory variables used in the regression analysis measure three underlying dimensions, namely training, management’s competitiveness and region. The first two latent variables (underlying dimensions) explain the majority of the total variance. The importance of quality human capital measures, such as the level of education, compensation and training, therefore highlights the importance of quality human capital development in the South African manufacturing sector.
The complete article has recently been published in Managing Global Transitions. International Research Journal, 10(1): 71-88.