What Determines Labor Productivity?

Labor productivity is the rate of output per worker within a specified unit of time. Economists and statisticians track labor productivity to determine the relative strength of an economy. For any period of time, the level of productivity is determined by two broad factors: capital equipment and applied technical efficiency.

To see how this works, consider a laborer is painting three identical walls. For the first two walls, he only has a 4-inch paintbrush, but in between painting the first and the second, he learns a more efficient brush technique. This allows him to paint the second wall more quickly, which increases his productivity. His capital equipment did not change; he used the same paintbrush, but his technical efficiency improved.

In between painting the second and third wall, the laborer replaces his paintbrush with a paint sprayer. He can still use the same technique, but the sprayer distributes his paint faster. In economic terms, he has better capital equipment.

There are many factors that can influence technical efficiency. Improved muscle memory or learning new techniques can improve productivity; economists call this specialization. A laborer might raise his productivity by receiving better education or training. Some factors, such as motivation, are more difficult to control and predict.

Tools are incredibly important determinants of productivity. It is easier to dig a ditch with a hydraulic-powered tractor than with a small shovel. Unfortunately, no capital goods can be built or improved without delaying present consumption because capital tools do not directly produce revenue and cannot immediately be consumed. This is why businesses rely on savings, investment, and loans while researching and improving their capital infrastructure.