PRODUCTIVITY AND GROWTH

1. Why is the standard of living so much higher in some countries than others?

2. How can we increase our standard of living?

3. What is labor productivity?

STANDARD OF LIVING

The standard of living is (imperfectly )by the quantity of goods and services produced per person or per capita

HOW TO INCREASE THE STANDARD OF LIVING?

1. Increase in the amount and quality of resources—land, labor, capital, and entrepreneurship.

2. Better technology3. Better “rules of the game”—tax laws, property

rights, market rules, . . .

4

Economic growth shown by shifts outward in the PPF

Capital goodsI I’

Cons

umer

goo

ds C

C’

A

(a) Lower growth

Capital goodsI I’’Co

nsum

er g

oods C

C’’

B

(b) Higher growth

An economy that produces more capital goods will grow more, as reflected by a shift outward of the PPF. More capital goods and fewer consumer goods are produced in panel (b) than in panel (a); so the PPF shifts out more in panel (b).

PRODUCTIVITY

Productivity is the ratio of a specific measure of output (such as real GDP) to a specific measure of input (such as labor). Think of productivity as output per unit of input.Labor productivity is output per unit of labor; measured by real GDP divided by hours of labor time employed to produce that output.

Labor productivity depends on the quality of the labor force. But it also depends on the efficiency with which

labor is integrated into the production

process.

WORKING SMARTER

7

Average years of education of working-age populations in 1998 and 2003

In 1998 the United States led major economies in average education of the working-age population, at 27%. By 2003 it had increased to 29%, both times ranking first among industrial market economies.

Improving the quality of the labor force requires

allocating scarce resources for education and training.

CAPITAL AND LABOR PRODUCTIVITY

A farmer can harvest more wheat per hour with a harvester.

Per-worker production function: The relationship between the amount of capital per worker and average output per worker (productivity).

Capital Deepening: An increase in the amount of capital per worker; one source of rising labor productivity.

10

Per-worker production function

PF

Out

put p

er w

orke

r

y

Capital per worker0 k

The per-worker production function, PF, shows a direct relationship between the amount of capital per worker, k, and the output per worker, y.

The bowed shape of PF reflects the law of diminishing marginal returns from capital: As more capital is added to a given number of workers, output per worker increases but at a diminishing rate and eventually could turn negative.

TECHNOLOGICAL CHANGEMany key innovations have boosted labor productivity, including:1. The assembly line2. Continuous process methods in refining and

chemicals3. Mechanization of agriculture4. Seed genetics5. Improved telecommunications6. Robotics7. Automated data capture8. Containerization9. Air conditioning10.Internet browser software

In most coffee shops these days, you'll find that the small, medium, and large coffee cups all use the same size lid now, whereas even five years ago they used to have different size lids for the different cups. That small change in the geometry of the cups means that somebody can save a little time in setting up the coffee shop, preparing the cups, getting your coffee, and getting out. Millions of little discoveries like that . . . have made the quality of life for people today dramatically higher than it was 100 years ago.

Professor Paul Romer, Stanford University

13

Impact of technological breakthrough on the per-worker production function

PF

Capital per worker0 k

PF’

Out

put p

er w

orke

r

y

y’

A technological breakthrough increases output per worker at each level of capital per worker.Better technology makes workers more productive.This is shown by an upward rotation of the per-worker production function from PF to PF’.An improvement in rules of the game would have a similar effect.

• 1971: 400 computations/second• 1981: 330,000 computations/second• Today: 3 billion computations/second• Productivity boost– Efficiency gains – production• Computers• Semiconductors

– Greater computer use by industry

14

Computers and productivity

15

Long-term trend in US labor productivity: annual average by decade

Year Qtr1 Qtr2 Qtr3 Qtr4 Annual1995 -1.2 0.5 0.5 3.4 0.51996 3.9 4.1 1.1 0.7 2.71997 -1.4 4.9 3.5 1.6 1.61998 3.2 1.2 4.6 2.1 2.81999 3.6 0.9 2.8 7.0 2.92000 -1.7 7.3 -0.8 3.9 2.82001 -0.5 5.6 1.8 6.0 2.52002 7.2 0.6 4.4 -0.4 4.12003 3.6 5.6 10.3 -0.3 3.72004 0.9 4.5 1.1 0.6 2.82005 3.2 0.3 3.7 -1.1 1.82006 2.5 1.8 -2.1 0.2 1.02007 0.0 4.1 5.8 0.8 1.42008 2.6 4.3

Source: www.bls.gov

Labor productivity in the USA since 1995

17

US labor productivity growth slowed during1974-1982, then rebounded

The growth in labor productivity declined from 2.9% per year between 1948 and 1973 to only 1.0% between 1974 and 1982. A jump in the price of oil contributed to three recessions during that stretch, and new environmental and workplace regulations, though necessary and beneficial, slowed down productivity growth temporarily. The information revolution powered by the computer chip and the Internet has boosted productivity in recent years.

18

US real GDP per capita has nearly tripled since 1959

19

US real GDP per capita was highest among major economies