According to the view of economic growth based on labor data labor productivity and number of hours worked are the two major determinants of the overall growth of the economy.
Labor productivity is the ratio of output to number of hours worked. It is also known as productivity per worker. It gives the quantity of output produced in the economy from one hour of labor effort. The formula for calculating labor productivity is
Increase in labor productivity implies more output is produced per hour. It may happen due to improvement in technology, increase in availability of capital per worker or due to efficient organization and management of work. Labor productivity determines the demand for labor.
The relation among output, labor productivity and hours worked is given by the formula
Transforming equation (2) in terms of growth rates we get
Thus, growth in output is caused by a positive change in labor productivity or a change in hours worked or both. However, growth of hours worked almost remains stable over time. Hence, growth of labor productivity is a major factor determining growth in output.
Employment growth refers to increase in the proportion of employed workers in total labor force. Employment growth in the economy in the long run is determined by the supply of and demand for labor.
Demand for labor is determined by the productivity of labor and the state of economic activity. If productivity of labor increases demand for labor increases and there will be a high growth of employment. Further, if there is a boom in the economy the economic growth will be high.
Hence, the number of employed workers among total labor force also increases. In times of recession and depression growth rate of firms will be very low or even negative. Then they do not hire more workers which cause a decline in employment.
Supply of labor is determined by the rate of growth of population. Total labor force increases with population growth. It leads to increased supply of labor.
When the supply of labor is very high compared to the demand for labor employment rate will come down. Employment declines if the growth of the labor force is more than the growth of the economy.
The trend output and productivity varied in three main postwar periods, which can be distinctly identified as follows:
• The period from October 1949 to November 1970: It is called as economic liftoff. In this period the United States was the strongest economy in the world. This period witnessed rapid growth in productivity of labor and hours worked.
• The period from November 1970 to November 1982: It is called the period of reorganization. Growth in labor productivity declined sharply in this period. Growth in hours worked increased only modestly hence there was a remarkable decline in growth of output. The United States faced many problems like high oil prices and high inflation. It witnessed poor macroeconomic policies. There was also a transition from manufacturing to services.
• The period from November 1982 to December 2010: It is called long boom. In this period both labor productivity and hours worked registered a remarkable increase contributing to high growth in output. The US economy witnessed a steady growth in output and became the powerful economy in the world.