Labor, Productivity and Economic Growth

The central question in this chapter is how nations increase their living standards - or the level of output per person - over time. Growth in output per person depends on two factors: average labor productivity and the share of the population that is working. Of the two, average labor productivity is the most important determinant of economic growth. This exercise helps you to better understand the relationship between changes in average labor productivity and changes in real output.

Exploration: How do changes in employment and labor productivity affect output in the economy?

The applet above illustrates the relationship between labor input (N) and the associated levels of output (Y) for a given production function. Average labor productivity is measured as the slope of the line from the origin to a point on the production function, or Y/N. You can change the overall productivity of labor by dragging the Productivity Index slider or change the level of employment (labor input) by dragging the pink triangle along the Labor Input (N) axis. Changing the productivity index value shifts the entire production function, while changing the level of employment moves the marker along the current production function. Click the Reset button to restore the original values.

1. What happens to output and average labor productivity (Y/N) as the number of workers employed increases, holding all other factors that can affect production constant? What happens to the values of Y/N in the table as N increases?
   
   
2. What happens to the level of output and output per worker (average labor productivity) for a given level of employment as labor productivity increases (the productivity index increases)? What happens to the level of output per person?
   
   
3. If an economy is currently producing 2000 units of output, what needs to occur to raise production to 3000 units of output?
   
   
4. Based on economic analysis of the production function illustrated in this applet, which of the following is most likely to lead to increases in output per person: increases in the share of the population that is working or increases in average labor productivity? Explain.

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