Labour Productivity

*Most of the time when LRAS curve shifts, the SRAS shifts as well

Tip for ADAS Diagram to explain productivity: Make sure to move the LRAS curve with the SRAS when productivity improves. Productive capacity increases -> lowers business costs (cost of production! must be mentioned when SRAS shifts) -> also means the SRAS will increase due to the increased efficiency

Only supposed to shift the LRAS and SRAS curves when productivity improves. (WACE EXAM)

• But also shift AD and say the next period it could result in an increase in AD -> due to higher rewards for labour, business profits, and government taxes.

Any increase in productive capacity means that an economy can achieve non-inflationary improvements in economic growth.

Importance of Long Run Economic Growth

Effects of Long Run Growth

• Increases employment
• Allows further increases in non-inflationary actual growth (AD rises with less upward pressure on inflation)
• Economic dividend: further increases in economic growth will increase tax collections and decrease government spending on welfare benefits connected to unemployment and poverty.
• Encourages new investment
• Attracts foreign direct investment
  • Both these investment points further increase economic growth

Productivity: Drivers/Factors

These are the drivers of productivity that ‘do more with less’ in the long term:

• Investment in physical capital and infrastructure (Capital Deepening)
  • Machinery, equipment, buildings, communication and transport. Investment implies capital deepening – more capital equipment per worker
  • Stock and Quality of capital equipment
• Investment in human capital through education and training is a key driver of productivity because it increases workers’ skill sets
  • Their ability to use capital equipment, to be creative, to solve problems and to implement innovations;
• Research and Development (R&D), invention and Innovation (Technological Progress) – searching for and applying new technologies and ideas.
  • There are three types of innovation: product, process and organisational, referring respectively to innovations in the nature of products and services; innovations in productive methods and processes and the implementation of new methods in a firms business practices workplace organisation and relations with other firms in their supply chain.
• Enterprise (management and entrepreneurship) combines other factors of production and is a crucial determinant of a firms ability to become more efficient and deliver better service, recognise opportunities and adapt to market changes to improve operations.
  • More entrepreneurs -> produce more efficiency and boosts competition
• Competition creates incentives to innovate and ensures that resources are allocated to the most efficient firms; and at an economy
  • Deregulation

Productivity

Productivity: Refers to the efficiency with which people or firms convert productive resources into outputs of goods and services.

\[Labour Productivity = Q/L\]

Where $Q$ represent output and $L$ is the number of hours worked

Simply put, labour productivity will rise if:

• More output can be produced with a given level of labour input, or
• Less labour input is required to produce a given amount of output

Labour Productivity can be separate into two components: (CANNOT BE TESTED SPECIFICALLY)

• Capital Deepening; and
  • Capital deepening refers to the accumulation of more capital equipment per worker - growth in the ratio of capital to labour (K/L)
  • Increasing capital deepening means more capital per worker
  • Typewriter vs Computer
• Multi-factor productivity (MFP)
  • All the ‘other’ changes in the quantity and quality of productive inputs
    • Increases in human capital
    • Research and development
    • Improvements in management practices
    • Innovation in products and productive processes
    • Competition in the economy which promotes the entry of new innovation businesses (Deregulation)
      • More competition -> better ones survive

Productivity: Policies

No need to rope learn!:

1. Labour market and workplace relations
2. Taxation reform
3. Trade liberalisation
4. Infrastructure Policy
5. Education and training
6. Research and Innovation
7. Deregulation and competition policy

An elaboration

1. Promote productivity-enhancing investments in research and development and information and communication technologies
2. Enhance competition through further product market deregulation
3. Alleviate financing constraints on small and medium enterprises (SMEs)
4. Promote venture capital
5. Expand the recognition of occupational licenses across more occupations and across all states and territories
6. Improve teacher training and student outcomes through reforms in the education sector
7. Increase training and job search assistance to help the long-term unemployed transition to new jobs.

APF (Aggregate Production Function)

K: Capital, L: Labour

APF: A descriptive model that explains something.

All goods and services are produced by combining resources (natural, human and capital).

At the firm level, production occurs when a firm employs labour and capital equipment to convert inputs (natural resources) into a final good or service.

At the macro level (the whole economy), the aggregate production function (APF) model was developed to explain the causes of economic growth.

*ONLY THE SHIFT IN APF WILL BE REQUIRED TO BE DRAWN

In the figure, the APF, PF1, shows the relationship between two variables – the labour force and the real GDP, holding other factors constant, such as the quantity of capital and the state of technology.

• The X-axis shows the size of the labour force in millions of people, and the Y-axis shows real GDP in billions of dollars.

Note that the APF is not a straight line - it is curved downwards – which means it rises at a decreasing rate.

• This is because of the economic principal known as Law of Diminishing Returns (LDMR) which holds that if more units of labour are used with a fixed amount of capital input, then output will rise, but at a decreasing rate.

Example:

• At the firm-level, for example, a café employs just 2 workers.
• They would be very busy trying to do all the necessary tasks (food preparation, serving customers and cleaning)
• Adding a third and fourth employee would increase output because each worker could specialise in a particular task – such as taking orders, making coffee, preparing food and washing dishes.
• Would output rise? – LDMR implies that the increase in production would get smaller with the addition of each worker.

Productivity and The APF

So far the assumption has been the quantity of capital and technology is fixed in the relationship between output and labour,

• In the café example, the capital inputs would be the coffee machine, point of sale register, kitchen appliances, dishwasher and tables and chairs.
• If the café invests in a new larger expresso machine, then a barista will be able to produce more espressos per hour.
• Increasing the amount of capital per worker will always result in an increase in labour productivity

The fig. shows the effect of either increasing the amount of capital equipment or improving the quality of the capital equipment that workers use on the aggregate production function.

• The result is that the APF will shift upwards from PF1 to PF2.
• This means that the amount that each worker can produce has increased.

Remember that a given production function is drawn assuming that the level of technology is fixed.

• So if we now allow technology to improve over time, then we will see an improvement in the quality of capital input.
• For example, computers and mobile phones have become faster and more powerful enabling workers to complete more tasks per unit of time.
• The important point is that technology can be a powerful factor in boosting labour productivity and shifting the APF upwards.
• The quality of labour can also improve over time and shift the APF as education and training improve the skills and knowledge of workers.

Some scenarios (not policies) to bring an upward shift in APF

• Training to improve skills
• Innovations
• Technology Advancements
• Education
• Health Programs