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CAPE TOWN - The concept of ‘pay for productivity’ is well documented in microeconomic theory. 

According to this concept, the labour market is in equilibrium when the marginal cost (extra cost) of employing an additional person is equal to the marginal revenue (extra production) earned by employing that person (assuming diminishing returns to scale on productivity).

This suggests that if the marginal revenue is greater than the marginal cost associated with employing an extra person, more employees should be hired. 

Conversely, if the opposite is true, employees should be released from the company if the marginal cost exceeds the marginal revenue. 

This theory will be tested against real South African data to see, where South Africa is positioned in terms of this equation and what this means for its strategy. 

Overall, the median salary increase was greater than CPI inflation between 2010 and 2016. 

It is important to note that real earnings are the earnings of employees after inflation has been taken into account or in other words, the earnings at constant price levels. 

The marginal cost of employing staff (median increases have outstripped CPI) is increasing at a faster rate than the marginal revenue (productivity). 

In terms of the labour market theory, one would expect that this has had a negative impact on employment between 2010 and 2016, in other words; one would expect the employment stats to erode.  

To get more more information on this issue listen below: 

iol-3-business-productivity-podcast.mp3

-EBIZ RADIO