Determinants of Productivity
Economics: IB Diploma, topic 2.4.2
Determinants of Labor Productivity
Sustained long-term economic growth comes from increases in worker productivity, which essentially means how well we do things. Human capital, technological change and economies of scale determine how productive workers are.
Labor productivity defined
- Labor productivity is the value that each employed person creates per unit of his or her input.
- The easiest way to comprehend labor productivity is to imagine a Canadian worker who can make 10 loaves of bread in an hour versus a U.S. worker who in the same hour can make only two loaves of bread.
- In this fictional example, the Canadians are more productive. More productivity essentially means you can do more in the same amount of time. This in turn frees up resources for workers to use elsewhere.
Human capital
- The first determinant of labor productivity is human capital.
- Human capital is the accumulated knowledge (from education and experience), skills, and expertise that the average worker in an economy possesses.
- Typically the higher the average level of education in an economy, the higher the accumulated human capital and the higher the labor productivity.
Technological change
- The second factor that determines labor productivity is technological change.
- Technological change is a combination of invention (advances in knowledge) and innovation, which is putting those advances to use in a new product or service.
Economies of scale
- The third factor that determines labor productivity is economies of scale. Economies of scale are the cost advantages that industries obtain due to size.
- Consider again the case of the fictional Canadian worker who could produce 10 loaves of bread in an hour. If this difference in productivity was due only to economies of scale, it could be that the Canadian worker had access to a large industrial-size oven while the U.S. worker was using a standard residential size oven.
Test yourself on Determinants of Productivity
Fill in the blank:
Technological change is a combination of invention (advances in knowledge) and ________, which is putting those advances to use in a new product or service.