Sustained long-term economic growth comes from increases in
worker productivity, which essentially means how well we do things. In other
words, how efficient is your nation with its time and workers? 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. Being more productive essentially
means you can do more in the same amount of time. This in turn frees up
resources to be used elsewhere. What determines how productive workers are? The
answer is pretty intuitive. 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.
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 that advance to use in a new product or service.
For example, the transistor was invented in 1947. It allowed us to miniaturize
the footprint of electronic devices and use less power than the tube technology
that came before it. Innovations since then have produced smaller and better
transistors that that are ubiquitous in products as varied as smart-phones,
computers, and escalators.
The development of the transistor has allowed
workers to be anywhere with smaller devices. These devices can be used to
communicate with other workers, measure product quality or do any other task in
less time, improving worker productivity. The third factor that determines
labor productivity is economies of scale. Recall that economies of scale are
the cost advantages that industries obtain due to size. (Read more about
economies of scale in Cost and 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 Canadian workers had access to a large industrial-size oven while the
U.S. worker was using a standard residential size oven. Now that we have
explored the determinants of worker productivity, let’s turn to how economists
measure economic growth and productivity.