Productivity growth

Productivity growth is a central concept of growth theory and describes an increase in output per unit input, so a positive change in the ratio of production results to the used for this purpose production factors (eg. As labor, capital and environmental), over time. Increases in productivity can result from more efficient work processes, improved organizational structures, improved framework conditions for the state, technical progress in general and from increased use of the production factors labor and capital.

definition

Productivity shows the efficiency of a process. Growth in an economy can be explained by an increase in the production factors labor and capital or by technological progress . Technological progress means that more can be produced today than in the past with the same amount of factors. The increase in productivity in an economy is often explained by technical progress (the formula-based derivation of the increase in productivity is therefore limited to technical progress). It can mean an increase in efficiency, better or new products as well as a greater variety of products and is often understood as a process of structural change in an economy.

Technical progress depends, among other things, on the results of research and development as well as on chance. The competition of the markets drives the companies to innovations and to the resulting process of creative destruction, described by Joseph Schumpeter . The process says that with the development of new products and new production methods, old products and old production methods become superfluous and thus displaced from the market. This process of displacement also applies to developments in the labor market.

Productivity gains caused by capital accumulation cannot bring lasting growth. This also applies to the savings rate, which only affects the development of production in the short term.

Formula-based derivation of productivity growth via technical progress

To understand the significance of the technical progress display, which is production function Y = F (K, N) by a factor A extended. This describes the state of the art. You get:

${\displaystyle {\mathit {Y=F(K,AN)}}{\begin{matrix}\end{matrix}}}$

With:

variable	definition
${\displaystyle Y}$	production
${\displaystyle K}$	capital employed
${\displaystyle N}$	number of employees
${\displaystyle AN}$	effective work

If one takes the capital as given, one obtains: Y = AN . The production is now dependent on the "effective work" AN , also called work in efficiency units.

Technical progress reduces the number of employees that are necessary to produce a certain amount. If you double A , the same amount can be produced with half the original number of employees. In other words: technical progress means that more and more goods can be produced with the same number of employees; efficiency increases.

The Solow residual is the difference between actual output growth and the share attributed to the growth of labor and capital. It is also known as total factor productivity and can be viewed as a measure of technical progress or a measure of the technical level of an economy.

The most common cause of the change in factor productivity is likely to be the increase in knowledge about production methods.

Definition of terms

Differentiation from economic growth

Economic growth is the change in the goods and services produced in an economy from one period to the next. This is mostly measured by GDP.

Differentiation to productivity level

The productivity level describes the level of productivity in an economy. Further education and training measures for employees enable higher productivity levels in the long term. However, at a given rate of technical progress, they do not lead to a permanently higher growth rate.

Delimitation from marginal productivity

Marginal productivity is the change in the amount of production that results from an (infinitesimally small) change in the use of a production factor when the other factors remain constant.

An increase in productivity, on the other hand, means an increase in output per input unit. The same output level can be achieved with less use of production factors. The increase in productivity does not necessarily result in an increase in production (there is a close relationship between production and productivity growth. In the short term, the causality runs from production to productivity growth, not the other way round.)

example

The increase in productivity can be clearly explained using the example of agriculture.
In the past, farmers tilled the fields with cattle and plow. That was very tedious and time-consuming. With technical progress came tractors and other agricultural machines, equipped with various implements that required at least one person to operate. Today there are GPS- controlled agricultural machines that work almost "independently".
One can now well imagine that the output per input unit has increased over time.

Calculation of the productivity increase

Comparison of productivity gains D - USA 1971-2006

GDP per hour worked - annual growth rates for Germany and the G7 countries

The productivity of an economy can be measured on the basis of the gross domestic product (GDP for short) per employed person (or GDP divided by the population). A more precise statement can be made with the GDP per hour worked. Here the effects of different working hours are eliminated and only the hours actually worked are taken into account.

Figure 1 shows the productivity growth in Germany and the USA measured in GDP per hour worked. Germany's productivity growth of five percent in 1991 can be interpreted as a consequence of reunification.

The productivity of an economy can also be measured in terms of value added .

Important connections and interactions

Relationship between wages, productivity and unemployment

Germany's average working hours and labor productivity in comparison from 1970 to 2006

The connection between productivity growth and wage increases results from the expectations of the employees or their representation by trade unions. The employees want to participate in the increasing efficiency of production. Therefore, productivity growth is used as a measure of wage adjustments in the collective bargaining of the unions. So are z. For example, wages in the Federal Republic of Germany are linked to productivity levels.

Furthermore, the increase in productivity can serve to shorten working hours (see graphic). A wage waiver would be accepted for this.

The relationships between wages, productivity growth and employment are as follows:

1. Wage increase = productivity increase → employment constant
2. Wage increase <productivity increase → employment increase
3. Increase in wages> increase in productivity → decrease in employment

Relationship between productivity and unemployment

The level of productivity growth is decisive for the level of employment. Okun's law describes the relationship between production growth and unemployment in an economy .

If one sets K constant again in the equation Y = F (K, AN) and converts to N , one obtains:

${\displaystyle N={\frac {Y}{A}}}$

According to the formula, technical progress in an economy, i.e. an improvement in technical knowledge, results in a decrease in employment. The unemployment rate would rise as the skills of some employees are less in demand. They suffer from the decline in relative wages and their employment. However, other employees experience a higher demand for their skills; you benefit from technical progress. As a result, there is constant structural change on the labor market (process of creative destruction ). In the context of the social market economy , one of the most important tasks of the state is therefore to shape the general economic conditions by means of economic, financial and social policy, general structural policy measures, so that structural adjustments do not lead to structural crises and mass unemployment.

The increasingly lower demand for low-skilled workers and the increasing demand for highly qualified personnel as well as the effects of international trade lead to wage spreads .

To what extent technical progress increases unemployment (technically induced unemployment) is in theory controversial. Productivity gains must be so high that they can offset the resulting falling demand for the low-skilled with the increasing demand for the highly skilled.

In general, a distinction is made between the following three effects of technical progress:

• labor-saving technical progress
• capital-saving technical progress
• neutral technical progress

Relationship between productivity and saving

Saving and investment develop in proportion to production: the higher the production, the higher the savings; the higher the investments. In the long term, the savings rate determines the level of production per employee. If all other premises are the same, countries with a higher savings rate will achieve a higher level of production in the long term. A higher savings rate means that production will grow faster for a while. However, the savings rate does not affect the long-term growth rate of production per employee.

Sustained growth in an economy is only possible if it is possible to increase production per capita through constant technical progress. An increase in the savings rate, however, increases the growth rate for a longer period of time because more capital is available for investment.

Robert Solow's book : Growth Theory provides a connection between the savings rate and production .

competitiveness

Germany's unit labor costs from 2004 to 2007

More efficient production processes can lower costs , which in turn reduces the prices of the goods produced. This increases the competitiveness of an economy, provided that the unit labor costs do not increase compared to other economies. In order to measure the competitiveness of an economy, not only productivity growth but also unit labor costs have to be considered. They describe the share of labor costs that are accounted for by one product unit.

Relatively high labor costs do not affect the international competitiveness of an economy as long as they can be compensated by the corresponding productivity advantages . It is therefore possible that an economy could not “keep up” in international competition despite high growth rates in productivity. Unit labor costs are thus becoming the focus of interest. However, foreign investments make the technical standard and know-how, i.e. the domestic productivity level, internationally mobile. Eastern European subsidiaries of German companies had already reached 60 percent of the productivity level of the parent company at the end of the last decade, although the national average productivity was less than a quarter of the German value. Therefore, mere differences in labor costs are more and more often the decisive factor when choosing the production location.

The graphic above shows Germany's unit labor costs across the economy.

"In comparison with 14 industrialized countries, the German manufacturing sector has the highest unit labor cost level, roughly on a par with Denmark and the United Kingdom. Important competitive countries such as Japan, the USA and France have a unit labor cost advantage of up to 27 percent. This unfavorable position is due to the fact that the German industry has only an average productivity level with high labor costs. Nonetheless, unit labor costs in Germany have declined by a total of 8 percent since 1996. This contrasts with a double increase in the period 1991 to 1996. Abroad, unit labor costs are in local currency On the other hand, it has already remained constant in the nineties and even decreased slightly overall between 1991 and 2004. "

Consequences of the increase in productivity

Given the capital and employment, the increase in productivity leads to the growth of an economy. The prosperity of a society and the standard of living of the population increase. In addition, it increases the level of production, which influences how much is saved and invested in an economy .

See also

• Technical progress
• Labor productivity
• Growth theory
• Total factor productivity
• Structural crisis

literature

• Olivier Blanchard, Gerhard Illing: Macroeconomics. 4th edition. Pearson Studium, Munich 2006, ISBN 3-8273-7209-7 .
• N. Gregory Mankiw: Macroeconomics. 5th edition. Schäffer-Poeschel Verlag, Stuttgart 2003, ISBN 3-7910-2026-9 .
• Lothar Wildmann: Economic Policy: Modules in Economics. Volume 3, Oldenbourg Wissenschaftsverlag, Munich 2007, ISBN 978-3-486-58197-3 .

Web links

• OECD database (English)

Individual evidence

1. ↑ Compare Olivier Blanchard, Gerhard Illing: Makroökonomie. 4th edition. Pearson Studium, Munich 2006, p. 403 ff.
2. ↑ Compare Olivier Blanchard, Gerhard Illing: Makroökonomie. 4th edition. Pearson Studium, Munich 2006, p. 344 ff.
3. ↑ Compare Olivier Blanchard, Gerhard Illing: Makroökonomie. 4th edition. Pearson Studium, Munich 2006, p. 373.
4. ^ Compare N. Gregory Mankiw: Macroeconomics. 4th edition. Schäffer Poeschel Verlag, Stuttgart 2000, p. 602.
5. ^ Compare N. Gregory Mankiw: Macroeconomics. 5th edition. Schäffer Poeschel Verlag, Stuttgart 2003, p. 273.
6. ↑ Compare Olivier Blanchard, Gerhard Illing: Makroökonomie. 4th edition. Pearson Studium, Munich 2006, p. 336.
7. ↑ Compare Olivier Blanchard, Gerhard Illing: Makroökonomie. 4th edition. Pearson Studium, Munich 2006, p. 381.
8. ↑ Compare Lothar Wildmann: Economic Policy: Modules of Economics. Volume 3, Oldenbourg Wissenschaftsverlag, 2007.
9. ↑ Compare Olivier Blanchard, Gerhard Illing: Makroökonomie. 4th edition. Pearson Studium, Munich 2006, p. 95.
10. ↑ Compare Olivier Blanchard, Gerhard Illing: Makroökonomie. 4th edition. Pearson Studium, Munich 2006, p. 403.
11. ↑ Compare Olivier Blanchard, Gerhard Illing: Makroökonomie. 4th edition. Pearson Studium, Munich 2006, p. 317 ff.
12. ↑ Compare Olivier Blanchard, Gerhard Illing: Makroökonomie. 4th edition. Pearson Studium, Munich 2006, p. 322 f.
13. ↑ Compare Olivier Blanchard, Gerhard Illing: Makroökonomie. 4th edition. Pearson Studium, Munich 2006, p. 331.
14. ↑ Compare Olivier Blanchard, Gerhard Illing: Makroökonomie. 4th edition. Pearson Studium, Munich 2006, p. 339.
15. ↑ ^{a b} Compare Christoph Schröder: IW Trends - Quarterly journal on empirical economic research from the Institute of the German Economy in Cologne. 32nd year, issue 3/2005, Deutscher Institut-Verlag