Salary versus Productivity

Economists usually make the simplifying assumption that salary is roughly equal to productivity, but that is at most acceptable for informal and self-employed people who are not exploited by an employer, not subsidized by tax-payer money, do not exploit non-renewable natural resources, and do not pay significant taxes.

A few examples from La Paz will illustrate what I mean. A typical self-employed mini-bus driver who works 12-15 hours per day 7 days per week will typically take home around $100-120 per month, implying an hourly wage of about a quarter of a dollar. A driver formally hired by the public sector, on the other hand, will typically earn at least the double, say $250 per month for working 8 hours per day 5 days a week, implying an hourly wage of about $1.50, i.e. 6 times higher than the mini-bus driver.

But who is most productive? The mini-bus driver gets at least 200 persons to their various destinations every day, while the public sector chauffeur gets maybe one minister to and from work, and possibly to a couple of meetings. The rest of the time he is just sitting in the car waiting. This means that the mini-bus driver is perhaps 50 times more productive than the ministerial chauffeur, but his salary is only one sixths.

The highest salaries in Bolivia are paid in the hydrocarbon sector, but this sector does not actually produce anything (it sells what mother nature produced over millions of years). The value added it creates by bringing oil and gas to the consumers currently appears quite high, but if oil prices were to return to their average level over the 1950-2000 period, value added would turn negative. Thus, profits and salaries in this sector has little to do with productivity.

The Bolivian public sector is full of people whose social productivity is actually negative, since their job essentially is to make life difficult for Bolivian citizens, for no other reason than to keep their own jobs and salaries. For example, in Denmark and Canada it takes about half an hour and no money to formally create a new enterprise, but in Bolivia hordes of bureaucrats and lawyers make sure that it takes an average of 50 days and costs 150% of average annual per capita GDP (1). No wonder entrepreneurs are so reluctant to go formal.

There is no doubt that large parts of the informal sector in Bolivia suffers from very low productivity, and consequently earn very low incomes, but it is not at all clear that productivity is higher in the formal public sector, even though salaries clearly are.

When studying productivity and informality, it is important to compare apples with apples, and leave out the public sector and the extractive sectors which completely distort the picture. A careful sector-by-sector analysis of productivity in the private sector may give some much needed insights into the factors that limit productivity. I doubt it is informality in itself that causes low productivity. Quite the contrary, by remaining informal you save hundreds of hours in reduced non-productive bureaucracy every year.

There are many well-educated people in Bolivia who command very high salaries, but choose to remain informal (i.e. they work alone, enjoy no job-security, have no health insurance, do not contribute to a pension fund, are not a member of any union, and the tax-authorities have no clue how much they are earning). But in statistical analyses this group is often excluded from the “informals”, and instead called “independent professionals”, probably in order to preserve the view of the informal sector as backward, unskilled and un-productive.

I challenge that view. I think informality spans the whole range from the poor woman walking around in the street trying to sell a handful of chamomile flowers that she picked somewhere to the international consultant who earns several times the income of the President of Bolivia. And as long as there are tremendous obstacles and no apparent advantages of becoming formal, that is going to continue.

Know of any examples that challenge the notion that productivity relates to salary? Leave a reply below.

(*) Director, Institute for Advanced Development Studies, La Paz, Bolivia. The author happily receives comments at the following e-mail:

(1) World Development Indicators, 2005.


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