The one-third rule estimates changes in labor productivity based on alterations in capital devoted to labor. This principle is utilized to determine the impact that technological advancements or capital investments have on production.
Key Takeaways
- The one-third rule is a helpful method to gauge changes in labor productivity when there are changes in capital per hour of labor.
- It assesses the impact of technology and capital changes on production efficiency.
- Enhanced labor productivity leads to a higher standard of living within an economy.
- Increasing human capital is crucial, especially in nations with lower labor force participation rates.
Understanding the One-Third Rule
Labor productivity refers to the economic measure of a worker’s hourly output relative to the GDP spent on that hour of work. The rule suggests that for every 1% increase in capital expenditures per labor hour, there will be a corresponding 0.33% increase in productivity, assuming all other variables remain consistent—no changes in technology or human capital, which encompasses the knowledge and experience of a worker.
Using this rule, economies or businesses can estimate how much influence technology or labor investments have on overall productivity. For instance, if a company sees a 6% rise in capital per hour of labor and simultaneously increases its stock of physical capital by the same percentage, and noting the involvement of technological advancements.
The formula used:
% Increase in Productivity = 1/3 (% Increase in Physical Capital/Labor Hours) + % Increase in Technology
Hence, if technological improvements account for a 4% rise in productivity, the remaining percentage could be attributed to capital investments.
When a country lacks sufficient human capital, it must focus on bolstering it through immigration policies and incentives to raise birth rates, or it should invest heavily in capital and technological advancements.
Factors That Affect Labor Productivity
Accurately measuring labor productivity can be challenging. While it’s straightforward to relate factory labor to goods produced per hour, the same can’t be said for service-based professions like waitressing, accounting, or nursing. Valuing an hour of labor in these fields requires estimation, as tangible valuation is impossible.
An increase in a nation’s labor productivity directly correlates to growth in real GDP per person. Higher productivity implies a greater number of goods produced per hour of labor, signaling a potential increase in the standard of living.
Real-World Example: Industrial Revolution
During the Industrial Revolution in Europe and the United States, technological leaps significantly boosted workers’ hourly productivity. This productivity boost led to a marked improvement in living standards. More goods and services generated per hour resulted in higher wages and, consequently, better living conditions.
Related Terms: labor productivity, gross domestic product, human capital, standard of living.
