What is Labor Productivity?
Labor Productivity refers to the quantity of output produced by a given quantity of labor input. Let's first consider the microeconomics of Labor Productivity. Suppose that two workers are given the same tools and equipment to perform a task, such as splitting wood. The worker who splits more wood in a given hour is said to be more productive at that task. Since the goods and services produced by labor have value, more productive workers add more value than less productive workers. The implication is that highly productive workers in a market economy command higher wages and salaries than their less productive fellow workers. In fact, under competitive conditions microeconomic theory predicts equilibrium wages will equal the added revenue generated by a marginal unit of labor (marginal revenue product).
From a macroeconomic point of view, productivity gains are the key to improvements in material standard of living. If Labor Productivity remained unchanged, then rising wages would increase the cost of producing a given quantity of output. If this occurred across the economy, then prices would rise, even under competitive conditions, undermining any real gain in worker purchasing power. On the other hand, if Labor Productivity is rising, then nominal wage growth is expected to outpace inflation, implying rising real wages and purchasing power.
Two key factors that can affect productivity are advances in technology and improvements in education and training. Differences in Labor Productivity are a key determinant of wage differences between industrialized and developing countries. In order for an economy to make further gains in material standard of living, workers must continue to invest in education and training, and firms must continue to invest in new technology.
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