It’s exam season for high school students. So, for 10 points explain how the following statement (in the ACT-National agreement and repeated uncritically by the media) can be true,I'm guessing what he means is something along these lines. Let Y=AF(L,K) where L is labour, K is capital, F() is the production function and A is total factor productivity (TFP). Then think of Y as GDP.closing the income gap with Australia by 2025… will require a sustained lift in New Zealand’s productivity growth to 3 per cent a year.given:
- productivity is just one factor in GDP (production = inputs x productivity, basically the amount produced depends on how much you put in times how much you get out per unit of what you put in)
-productivity growth tends to move in the opposite direction to the amount of labour and capital input growthBut growth in total factor productivity is a residual term (often called the Solow residual). TFP is the change in output that cannot be explained by changes in inputs. That is, it is the amount of output growth that remains after we have accounted for the determinants of growth we can measure, ie growth in labour and capital. So I'm really not sure what Peirson means by his statement. A can increase while L and K remain constant. L and K can increase while A remains constant. A could go down when L and K goes up or when K and L go down. Depending on what happens to Y. His statement would be true if Y remains constant. Then if L and K increase, A would have to fall. But why would you increase L and K if Y does also increase? This could not be profit maximising. You get the same output at a higher cost of production because of the increase in inputs.
- ie. productivity actually usually increases faster when GDP growth is slack or after a recession and productivity growth slows when GDP goes through a sustained period of rapid growthI would love to see his data on this.
- incomes (ie. wages and salaries, the price of labour) is a result of supply and demand for labour, not the productivity of labour.He is right, incomes are determined by supply and demand but the demand for labour depends on the productivity of labour. A profit maximising firm's demand for labour is determined by P*MPL=W/P where W/P is the real wage and MPL is the marginal product of labour. The MPL schedule is the firm's demand for labour. The MPL will depend on the productivity of labour.
Indeed, wages usually increase fastest when there is a shortage of labour and rising demand while productivity increases fastest when there is an abundance of labour and falling demand (because only the ‘highest quality’ labour is used).The first part of this statement is true but I don't understand the second part. Why does productivity (and what form of productivity is he talking about) increase fastest when labour is abundant? From what I said above TFP is the residual after accounting for changes in output due to changes in inputs. So I'm not sure what he thinks he is saying.
Or have I missed something?