Question

Question 5 [10]A large share of the growing expenditure in South Africa goes towards the remuneration of employees (the so-called wage bill). Explain how unbalanced productivity growth (According to Baumol’s unbalanced productivity growth model) affects government expenditure, and briefly comment on its relevance to South Africa.

Subject: Government economics 20A

Answer 1

Answer-Baumol’s unbalanced productivity growth model states that rise in wages in unproductive sectors is a burden to the government and he termed this as 'cost disease'. Baumol observed that, there are two types of sectors in every economy-one in which productivity rises swiftly and the other in which productivity rises very slowly or not at all. But, the rise in wages in both the sectors must be same, because, otherwise, the workers of the low productivity sectors will not be willing to work and leave job to work in the productive sectors for better wages.

Considering the example of South Africa, labour productivity has registered only slow growth since 2000, according to a study undertaken by Rand Merchant Bank in South Africa. It has been an old problem in South Africa which have created much concern now as a  large share of the growing expenditure in South Africa goes towards the remuneration of employees. If this continues, there will be a wastage of government resources without any help in the economic growth of the continent. There is an urgent need for positive action to be taken aimed at constant increase in the level of productivity in the use of resources, at the individual, enterprise, organization and national levels in South Africa and also the adoption of appropriate measures for promoting productivity development will help. This will help to increase the share of labour productivity in the national income of South Africa.