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How labour productivity affects living standards

Nobel prize winning economist, Paul Krugman famously said:

Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.

There are different notions of productivity but we will refer to labour productivity or output per worker (or more accurately output per hour worked), which is the definition that Paul Krugman used. For a more detailed look at how we define what productivity actually is and what drives productivity, read this research note produced by the Productivity Commission (2015a).

Essentially, labour productivity means getting more output from workers. It is about the efficiency of labour. Let’s look at Australia as an example. There was a steady rise in labour productivity growth from 1973 to 2014 of 2.3% on average, particularly from March 1978. We can see this clearly in the chart below. This increase is despite some bumps along the way.

A graph which shows labour productivity increasing steadily between the years 1973 and 2016

You can also view these statistics and more in the Australian Government’s Productivity Commission’s 2015b update. On this webpage you may find the tabs on productivity at a glance and the infographic of particular interest.

This steady increase begs the question: what drives productivity growth? These are the key drivers of productivity growth that industrialised countries have been able to focus their attention on:

  • knowledge creation, dissemination (education) and application (innovation)
  • laws & institutions (legal, social, cultural)
  • trade openness
  • geography and natural resources
  • economies of scale
  • infrastructure
  • saving.

For an explanation of how these factors affect productivity growth see Productivity Commission (2015a, pp.1-7).

However, over the 12 months from January to December 2016 labour productivity growth in Australia was just 1.1%, a decrease from the average 2.3% enjoyed in the previous 30+ years. This productivity slowdown has been felt in all advanced countries.

There is now intense debate among economists about whether productivity growth has permanently slowed or whether the current slowdown is just temporary. This is yet to be seen - either way it will impact the next generation as we have seen that productivity growth greatly affects the living standards future generations can expect.

Your task

Consider which side of the debate you would argue - that productivity growth has permanently slowed or that the current slowdown is just temporary. Share your ideas in the comments below.

References

Krugman, P. (1997). The age of diminished expectations : U.S. economic policy in the 1990s. Cambridge, Mass.: MIT Press

Reserve Bank of Australia. (2012). Labour Productivity: GDP per worker in 2011 dollars. Retrieved from http://www.rba.gov.au/statistics/


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This article is from the free online course:

Exploring Economics: Will the Next Generation Be Worse Off?

Griffith University

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