South-Western College Publishing - Economics  
Pleasing Progress of Productivity
Subject Labor Productivity, Economic Growth
Topic Productivity and Growth
Key Words Productivity, Inflation, Unemployment, Economic Growth, Standard of Living
News Story

The Labor Department reported that labor productivity, the amount that a worker produces in an hour of work, rose at an annual rate of 3.7 percent in the fourth quarter of 1998. This increase marks the third year of gains in the productivity measure and the largest quarterly increase since the first quarter of 1996. Experts say that strong economic growth and a prosperous economy have resulted in firms squeezing more productivity from workers, oftentimes by running equipment at full capacity. Increases in productivity allow firms to give their workers increases in pay while holding price increases to moderate levels. Productivity increases are also instrumental in raising the nation's standard of living.

In the 1950s and 1960s large increases in productivity were responsible for rapid economic expansion, rising wages, low unemployment and low inflation. Although the current period can be described in this same way, analysts are uncertain whether productivity growth will fall when the economy slows or whether there has been a long-lasting structural improvement that will continue to raise our standard of living. Some argue that better education, on-the-job training and major investments in computers and information processing technology have indeed increased the long-term growth prospects of the economy. Others argue that it is too soon to tell. For example, since productivity is measured by dividing the dollar value of all goods and services produced by the number of worker hours used in production, productivity is sensitive to the way prices are measured. The recent revisions to the Consumer Price Index have reduced the measure of inflation and are partly responsible for the increase in the measure of productivity.

Nonetheless, the increase in productivity is nothing to sneer at. Improvements in productivity result in increased incomes and living standards.

(Updated March 1, 1999)

1. What is labor productivity? How is it measured?
2. What factors are responsible for increasing labor productivity?
3. What is the relationship between labor productivity, the rate of capital formation, and skill and education levels?
Source Louis Uchitelle, "Productivity Set Face Pace in Late 1998", The New York Times, February 10, 1999.

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