The factors affecting labour productivity

What are the determinants of labour productivity?

Investment in physical capital

Investment in human capital

Technological progress

What is physical capital?

The machinery and equipment that workers use in the production of goods and services. Examples include computers, buildings and roads.

What is capital widening?

Both the quantity of labour and capital increase at the same rate. This means that the capital-labour ratio stays constant.

What is capital deepening?

When the capital-labour ratio increases. This is essential to increase labour productivity.

What is human capital?

Human capital refers to the knowledge, skills and competencies of workers.

What is technological progress?

The improvement in the quality of inputs over time - including capital, labour and natural resources. Occurs through inventions and innovations.

Investment in research and development

By investing in R and D firms strive to deliver better products to buyers at lower costs. Achieving this delivers the owners of capital higher profits.

What is multi-factor productivity?

MFP reflects the improvements in the quality of capital, labour and other inputs caused by technological change. It measures the change in output that cannot be accounted for by changes in the inputs of labour and capital.

What is MFP reflected in?

The value of new management practices that allow capital and labour to be combined more effectively

The value of more advanced technology embedded in new capital

The value of a more skilled and educated workforce

Innovation in products or production processes

What is labour productivity growth equal to?

Capital deepening + MFP growth

Trend of labour productivity

There has been a slowdown in productivity over recent decades this is due to a decline in MFP growth relative to capital deepening. This is due to slowdown of technological advances.