Labor productivity is the measure of an economy's hourly output of goods and services. Along with unemployment, the jobs data, and the consumer price index, economists track labor productivity to determine the relative strength of an economy. Any change in labor productivity helps economists understand both recent and historical changes to the economy. For any period of time, the level of labor productivity is determined by two broad factors: capital equipment and applied technical efficiency.

Labor Productivity and Applied Technical Efficiency

Technical efficiency is the effectiveness with which a given set of inputs is used to produce an output. A worker is said to be technically efficient if they producing the maximum output from the minimum quantity of inputs, such as labour, capital, and technology.

To see how this works, consider a laborer is painting three identical walls. For the first two walls, he only has a 4-inch paintbrush, but in between painting the first and the second, he learns a more efficient brush technique. This allows him to paint the second wall more quickly, which increases his productivity. His capital equipment did not change; he used the same paintbrush, but his technical efficiency improved.

Increasing Technical Efficiency

There are many factors that can influence technical efficiency. Improved muscle memory or learning new techniques can improve productivity; economists call this specialization. A laborer might raise his productivity by receiving better education or training. Some factors, such as motivation, are more difficult to control and predict.

Labor Productivity and Capital Goods

In between painting the second and third walls, the laborer replaces his paintbrush with a paint sprayer. He can still use the same technique, but the sprayer distributes his paint faster. In economic terms, he has better capital equipment.

Improving Capital Equipment

Tools are incredibly important determinants of productivity. It is easier to dig a ditch with a hydraulic-powered tractor than with a small shovel. Unfortunately, no capital goods can be built or improved without delaying present consumption because capital tools do not directly produce revenue and cannot immediately be consumed. This is why businesses rely on savings, investment, and loans while researching and improving their capital infrastructure.