(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 239

214 PART 2 • Producers, Consumers, and Competitive Markets
outstripped the growth in demand, prices, apart
from a temporary increase in the early 1970s,
have been declining.
Hunger remains a severe problem in some
areas, such as the Sahel region of Africa, in part
because of the low productivity of labor there.

Although other countries produce an agricultural surplus, mass hunger still occurs because of
the difficulty of redistributing food from more to
less productive regions of the world and because
of the low incomes of those less productive
regions.

Labor Productivity
• labor productivity Average
product of labor for an entire
industry or for the economy as
a whole.

• stock of capital Total
amount of capital available for
use in production.
• technological change
Development of new
technologies allowing factors
of production to be used more
effectively.

Although this is a textbook in microeconomics, many of the concepts developed
here provide a foundation for macroeconomic analysis. Macroeconomists are

particularly concerned with labor productivity—the average product of labor
for an entire industry or for the economy as a whole. In this subsection we discuss labor productivity in the United States and a number of foreign countries.
This topic is interesting in its own right, but will also help to illustrate one of the
links between micro- and macroeconomics.
Because the average product measures output per unit of labor input, it is
relatively easy to measure (total labor input and total output are the only pieces
of information you need). Labor productivity can provide useful comparisons
across industries and for one industry over a long period. But labor productivity is especially important because it determines the real standard of living that a
country can achieve for its citizens.

PRODUCTIVITY AND THE STANDARD OF LIVING There is a simple link
between labor productivity and the standard of living. In any particular
year, the aggregate value of goods and services produced by an economy is
equal to the payments made to all factors of production, including wages,
rental payments to capital, and profit to firms. Consumers ultimately receive
these factor payments in the form of wages, salaries, dividends, or interest
payments. As a result, consumers in the aggregate can increase their rate
of consumption in the long run only by increasing the total amount they
produce.
Understanding the causes of productivity growth is an important area of
research in economics. We do know that one of the most important sources of
growth in labor productivity is growth in the stock of capital—i.e., the total
amount of capital available for use in production. Because an increase in capital means more and better machinery, each worker can produce more output
for each hour worked. Another important source of growth in labor productivity is technological change—i.e., the development of new technologies that
allow labor (and other factors of production) to be used more effectively and to
produce new and higher-quality goods.
As Example 6.3 shows, levels of labor productivity have differed considerably across countries, as have rates of growth of productivity. Given the central
role that productivity has in affecting our standards of living, understanding
these differences is important.