Productivity and growth

1
Productivity and growth
Productivity is measured by
2
Employment and Labor Productivity
RealGDP
Slope productivity 66,666
Slope productivity 70,000
Productivity is given by the slope of a line from
the origin to a point on the production function
8 Trillion
B
A
7 Trillion
0
100
120
Millions of Workers
3

• Shifts of the Aggregate Production Function
• Increase in the stock of human capital
• Increase in the stock of physical capital
• Technical change

RealGDP
productivity 80,000
H
8 Trillion
B
7 Trillion
A
productivity 70,000
0
100
120
Millions of Workers
4
Enlarging the stock of human capital means
allocating scarce resources for education and
training. There is an opportunity cost for both
individuals and society.
5
Providing resources for education and training
entails a short-run trade-off.
A
B
All other goods
0
Education and Training
6
Net investment raises the capital to labor ratio,
ceteris paribus. This boosts productivity
Real GDP ( Trillions)
0
Employment (millions)
7
But production of capital goods involves
trade-offs too
A
B
All other goods
0
Capital goods
8
Policies to stimulate investment

• Increase incentives to invest
• Reduced corporate profit taxes.
• Investment tax credits

• Increase incentives to save
• Reduce taxes on capital gains.
• Tax consumption

Government Deficit Reduction
9
An Increase in Investment Demand
InterestRate
5
3
I2 New Demand for Funds
I1 Original Demand for Funds
0
1.5
1.75
2.25
Funds ( Trillions)
10
An Increase in Saving
InterestRate
S1 Original Supply of Funds
S2 New Supply of Funds
B
F
5
C
3
InvestmentSpending
0
1.75
2.25
2.5
Funds ( Trillions)
11
Reduction of the Government Deficit
InterestRate
Supply of Funds (Saving)
Deficit is reduced from .75 trillion to zero
E
A
5
B
3
Investment Spending Deficit
Investment Spending
0
1.0
1.5
1.75
Funds ( Trillions)
12
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
Robert Solow. Technical Change and the Aggregate
Production Function, 1919-1954, Review of
Economics and Statistics, November 1957.
13
Productivity boosting innovations

• 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

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Productivity Growth in the USA
  Average
  Productivity Growth
Period Per Year (Percent)
1955-1971 2.838
1972-1995 1.665
1996-2005 2.957
Source Bureau of Labor Statistics
15
Economists refer to the 1972-95 period as the
big slowdown
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Policies to Stimulate Innovation

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
   rightse.g., issuance of patents.

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R D absorbs scarce resources
A
B
All other goods
0
Research and Development