Productivity and Growth Why is the standard of living so much higher in some countries than others? How can we increase our standard of living? 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? Increase in the amount and quality of resources—land, labor, capital, and entrepreneurship. Better technology Better “rules of the game”—tax laws, property rights, market rules, . . .

Economic growth shown by shifts outward in the PPF (a) Lower growth (b) Higher growth Consumer goods C C’ Consumer goods C C’’ A B Capital goods I I’ Capital goods I I’’ 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.

Working smarter 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.

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.

Per-worker production function Output per worker y The per-worker production function, PF, shows a direct relationship between the amount of capital per worker, k, and the output per worker, y. PF Capital per worker k 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 change Many key innovations have boosted labor productivity, including: The assembly line Continuous process methods in refining and chemicals Mechanization of agriculture Seed genetics Improved telecommunications Robotics Automated data capture Containerization Air conditioning 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

Impact of technological breakthrough on the per-worker production function Output per worker 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. PF’ PF Capital per worker k

Computers and productivity 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

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

Labor productivity in the USA since 1995 Year Qtr1 Qtr2 Qtr3 Qtr4 Annual 1995 -1.2 0.5 3.4 1996 3.9 4.1 1.1 0.7 2.7 1997 -1.4 4.9 3.5 1.6 1998 3.2 1.2 4.6 2.1 2.8 1999 3.6 0.9 7.0 2.9 2000 -1.7 7.3 -0.8 2001 -0.5 5.6 1.8 6.0 2.5 2002 7.2 0.6 4.4 -0.4 2003 10.3 -0.3 3.7 2004 4.5 2005 0.3 -1.1 2006 -2.1 0.2 1.0 2007 0.0 5.8 0.8 1.4 2008 2.6 4.3   Source: www.bls.gov

US labor productivity growth slowed during 1974-1982, 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.

US real GDP per capita has nearly tripled since 1959

US real GDP per capita was highest among major economies