What Is the One-Third Rule?

The one-third rule estimates change in labor productivity based on changes in capital devoted to labor. The rule is used to determine the impact that changes in technology or capital have on production.

Labor productivity is an economic term that describes the cost of a worker's hourly production based on the amount of gross domestic product (GDP) spend to produce that hour of work. In particular, the rule asserts that for an increase of 1% in capital expenditures to labor, a resulting productivity increase of 0.33% will happen. The one-third rule further assumes that all other variables remain static. So, no changes in technology or in human capital occur. Human capital is the knowledge and experience a worker has.

Key Takeaways

  • The one-third rule is a rule of thumb that estimates the change in labor productivity based on changes in capital per hour of labor.
  • The more goods and services a laborer can produce in an hour of work, the higher the standard of living in that economy.
  • It can be hard to obtain more human capital, especially in countries that have a lower participation rate, or percentage of the population participating in the labor force.

Understanding the One-Third Rule

Calculating Labor Productivity

Using the one-third rule an economy or business may estimate how much technology or labor contributes to overall productivity. As an example, if let’s say your company experiences a 6% increase in capital for an hour of labor for a given period. In other words, it costs you more to employ your workers. At the same time, the company’s stock of physical capital also increased by 6%.

You could use the equation % Increase in Productivity = 1/3 (% Increase in Physical Capital/Labor Hours) + % Increase in Technology to infer that 4% of the increase in productivity was due to advancements in technology.

Factors That Affect Labor Productivity

Labor productivity can be hard to quantify accurately. While it’s simple enough to draw a connection between the number of goods produced by factory labor in one hour of work, for example, it’s harder to place a value on service. How much is an hour of a waitress’s time worth? What about an hour of an accountant’s? What about a nurse’s? Statisticians can estimate the dollar value of labor in these professions, but without tangible goods to appraise, an exact valuation is impossible.

An increase in a country's labor productivity will, in turn, create growth in the real GDP per person. Since productivity indicates the number of goods an average worker can produce in one hour of labor, it may give clues to a country's standard of living.

For example, during the Industrial Revolution in Europe and the United States, rapid industrial technological advances allowed workers to make great gains in their hourly productivity rates. This increased production led to higher standards of living in Europe and the United States. In general, this happens because, when laborers can produce more goods and services, their wages increase, too.

When a nation has a shortage of human capital, it must either focus on increasing human capital through immigration and offering incentives to raise birth rates, or on increasing capital investments and developing new technological advancements.