What Determines Labor Productivity?

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.

Key Takeaways

  • For any period of time, the level of labor productivity is determined by two broad factors: capital equipment and applied technical efficiency.
  • Labor productivity refers to how efficient workers are in generating products and profits for s firm.
  • It is typically measured in terms of output per hour.
  • Technology can help increase a worker's output and productivity.
  • Skills training and capital improvements are additional ways to increase labor productivity.


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 produce the maximum output from the minimum quantity of inputs, such as labor, capital, and technology.

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

To calculate labor productivity, divide the total output by the total number of labor hours. 

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 their 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 the paintbrush with a paint sprayer. They can still use the same technique, but the sprayer distributes the paint faster. In economic terms, they have 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.

What Factors Increase Labor Productivity?

Improvements in a worker's skills and relevant training can lead to increased productivity. Technological progress can also help boost a worker's output per hour.

What Factors Decrease Labor Productivity?

Labor productivity can arise from a decline in workers' skills and education. An uneducated or unmotivated labor force is, therefore, a big concern for corporations. Additionally, being unable to catch up with technological progress elsewhere can leave productivity behind.

What Is Multifactor Productivity (MFP)?

Also known as total factor productivity (TFP), multifactor productivity (MFP) measures the excess value embodied in the output of an economy after accounting for all of the inputs (including labor, capital, services, etc.). This was identified by the economist Robert Solow as a key measure of efficiency in an economy, and it's sometimes called the Solow Residual, as a result.

How Does the Division of Labor Impact Productivity?

The division of labor (DOL) describes the process of specialization by the labor force. Due to this process, each individual worker focuses more specifically on a narrow set of skills or tasks, making them more efficient at this one facet of production. This increases productivity, versus having to switch tasks or learn new and different skills across the various steps in producing a product.

How Do You Calculate Labor Productivity?

Labor productivity is calculated as quantity produced divided by hours worked. This can be computed for an individual worker, a company, or in aggregate for an entire economy.

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