Macroeconomics
...e labor supply automatically assumes greater productivity and higher GDP, or does it? Actually, it all depends on the amount of output per unit of labor input, which is called labor productivity. Labor productivity depends on two things, the level of multifactor productivity, which is the ratio between total input and total output, and the ratio of capital to labor. The more efficiently inputs are used, the more productive labor will be, which will cause greater output and growth in GDP. If there is more capital that is available, labor will be more productive. The United States has been experiencing a slowdown in the growth rate of GDP, which has a connection with labor productivity. One quarter of the decline in labor productivity growth resulted from slower growth in the amount of capital per worker. The rest results from slower growth in multifactor productivity. The U.S. economy has changed from mostly the production of goods toward the production of services in recent years. Manufacturing contributed to 29 percent of GDP in 1950 and in 1996 it only contributed 18 percent. Services in finance, insurance and real estate contributed 20 percent in 1950 towards GDP and in 1996 up to 37 percent. There is little room for productivity improvement is limited, so that explains the slowdown of productivity growth. Slower growth in the quality of labor has resulted in the decline of multifactor productivity (Auerbach/Kotlikoff). Increases in labor productivity moves in the opposite direction to the increase in labor hours. Productivity increases faster when the input of labor hours moves slowly. The reason for this is because if there are fewer workers entering the labor force, they have more capital to work with, so each worker can produce more. The U.S. labor force has changed over the past few years. More women have entered the labor force. There is also an increase in inexperienced workers and slower rate ...