Economics » Economic Growth » Labor Productivity and Economic Growth

Key Concepts and Summary

Key Concepts and Summary

Productivity, the value of what is produced per worker, or per hour worked, can be measured as the level of GDP per worker or GDP per hour. The United States experienced a productivity slowdown between 1973 and 1989. Since then, U.S. productivity has rebounded (the current global recession notwithstanding). It is not clear whether the current growth in productivity will be sustained. The rate of productivity growth is the primary determinant of an economy’s rate of long-term economic growth and higher wages. Over decades and generations, seemingly small differences of a few percentage points in the annual rate of economic growth make an enormous difference in GDP per capita. An aggregate production function specifies how certain inputs in the economy, like human capital, physical capital, and technology, lead to the output measured as GDP per capita.

Compound interest and compound growth rates behave in the same way as productivity rates. Seemingly small changes in percentage points can have big impacts on income over time.

Glossary

aggregate production function

the process whereby an economy as a whole turns economic inputs such as human capital, physical capital, and technology into output measured as GDP per capita

compound growth rate

the rate of growth when multiplied by a base that includes past GDP growth

human capital

the accumulated skills and education of workers

innovation

putting advances in knowledge to use in a new product or service

invention

advances in knowledge

labor productivity

the value of what is produced per worker, or per hour worked (sometimes called worker productivity)

production function

the process whereby a firm turns economic inputs like labor, machinery, and raw materials into outputs like goods and services used by consumers

technological change

a combination of invention—advances in knowledge—and innovation

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