The growth of productivity that is output per unit of input is the basic determining factor of the growth of a country’s materialistic standard of living. The most commonly mentioning measures are output per worker and output per hour which are the measures of labor productivity or efficiency. One cannot have constant growth in output per person that is the most general measure of a country’s material standard of living without constant growth in output per worker.
Increase in output per hour means reductions in hours for per unit of output. In American car industry, as labor productivity rose during the 1920s, it took fewer and fewer hours to design Model T. then the price of automobiles fell, and the real standard of living of Americans rose.
Another example of productivity is: In 1790, 90 percent of the labor force worked in agriculture. In the year 2000, less than 1.4 percent of the labor force was employed in agriculture, still producing enough for the U.S. population to eat as well as for exports as well. This is possible due to continuing improvements in labor productivity in agriculture.
If the demand for a product or service is price inelastic which means if a given percentage reduce in price results in a lower percentage increase in the quantity demanded then fast productivity improvement can result in workers having to leave the industry. The reason is that industry output, yet if it has risen somewhat, can now be produced with fewer workers. This ultimately became true for grain farming, but not for computers as there the demand is more price elastic. Because the relative price declines produced a big increase in quantity demanded that industry employment has actually increased rather than decreased.
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