Productivity is measured by: Real GDP Millions of Workers 0 100120 $7 Trillion $8 Trillion Employment and Labor Productivity A B Slope = productivity.

Productivity is measured by:

Employment

Outputoductivity Pr

RealGDP

Millions of Workers

0 100 120

$7 Trillion

$8 Trillion

Employment and Labor Productivity

A B

Slope = productivity = $70,000

Slope = productivity = $66,666

Productivity is given by the slope of a line from the origin to a point on the production function

RealGDP

Millions of Workers

0 100 120

$7 Trillion

$8 Trillion

Shifts of the Aggregate Production Function

1. Increase in the stock of human capital

2. Increase in the stock of physical capital

3. Technical change

AB

productivity = $70,000

productivity = $80,000

H

Enlarging the stock of human capital means

allocating scarce resources for education and

training. There is an opportunity cost for both individuals and

society.

Education and Training

All

oth

er g

ood

s

0

AB

Providing resources for education and training entails a short-run trade-off.

Net investment raises the capital to labor ratio, ceteris

paribus. This boosts productivity

0 Employment (millions)

Rea

l GD

P (

$ T

rill

ion

s)

Capital goods

All

oth

er g

ood

s

0

AB

But production of capital

goods involves trade-offs too

Increase incentives to invest

1. Reduced corporate profit taxes.

2. Investment tax credits

Increase incentives to save:

1. Reduce taxes on capital gains.

2. Tax consumptionGovernment Deficit Reduction

InterestRate

Funds ($ Trillions)

0

An Increase in Investment Demand

I1 = Original Demand for Funds

I2 = New Demand for Funds

3%

5%

1.5 1.75 2.25

InterestRate

Funds ($ Trillions)

0

An Increase in Saving

1.75 2.25 2.5

InvestmentSpending

3%

5%

S1 = Original Supply of

Funds S2 = New Supply of Funds

BF

C

InterestRate

Funds ($ Trillions)

0

Reduction of the Government Deficit

Investment Spending + Deficit

Investment Spending

Deficit is reduced from $.75 trillion to zero

1.0 1.5 1.75

Supply of Funds (Saving)

5%

3%

E A

B

Robert Solow. “Technical Change and the Aggregate Production Function, 1919-1954,” Review of Economics and Statistics, November 1957.

Professor Solow has claimed that about 2/3 of

the growth of real GDP per head in the the U.S. can be

explained by technical innovation

•Steam engine•Electrification•The assembly line•Continuous process manufacturing•The telephone•Internal combustion engine•Air conditioning•Cotton harvester •The transistor•The computer•Electronic data interchange•Robotics•Genetically-modified seeds•Internet browser software

  Average

  Productivity Growth

Period Per Year (Percent)

1955-1971 2.838

1972-1995 1.665

1996-2005 2.957

Source: Bureau of Labor Statistics

Productivity Growth in the USA

Economists refer to the 1972-95 period

as “the big slowdown”

Index of Output Per Worker Per Hour in the USA (1972 = 100)

20

40

60

80

100

120

140

19

47

19

50

19

54

19

57

19

61

19

64

19

68

19

71

19

75

19

78

19

82

19

85

19

89

19

92

19

96

19

99

20

03

Year

1. Tax credits to provide incentives for private research and development

2. Give incentives to the pursuit of careers in science and engineering

3. Public funding of R & D

4. Legal protections of intellectual property rights—e.g., issuance of patents.

Research and Development

All

oth

er g

ood

s

0

AB

R & D absorbs scarce resources