Economics

Business

Quiz 22 :
Unemployment and the Labour Market

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Quiz 22 :
Unemployment and the Labour Market

Per capita GDP: Per capita GDP is defined as the total output divided by the total population of an economy. Per capita GDP and fertility of factors of production: Factors of production such as availability and fertility of land, quantity and quality of labor, entrepreneur ability, capital stock, and natural resources have significant impacts on the per capita GDP of an economy. Countries with low fertile and less number of cultivable lands can have greater per capita GDP if positive impact of other factors of production offsets the negative impact of scarce land on per capita GDP of an economy. Richer countries may have fewer lands to use in the production process but the allocation of those lands might be fully utilized. Efficient entrepreneur ability with advanced technology can result in higher productivity and thereby higher per capita GDP. Countries which have fewer lands might have other natural resources to boost overall economic activities of that economy. Hence, efficient entrepreneur ability, advanced technology and optimum allocation of available resources can raise the per capita GDP of an economy by offsetting the impact of availability of fewer lands on per capita GDP.

Changes in capital stock and labor productivity Labor productivity can be enhanced by raising capital per worker. Capital can either be human capital or physical capital. Human capital refers to the quality of a worker, whereas physical capital refers to the quantity of capital. Thus, labor productivity can be enhanced by raising the level of human capital and/or by increasing quantity of capital per worker. Per-worker production function: Human capital If more and more of human capital are employed along with a unit of labor, then average output produced per worker will increase initially at an increasing rate, and later, it will increase at decreasing rate. An increase in human capital, that is, quality of capital, will shift the per-worker production function upward with same intercept. Per-worker production function: Physical capital If more and more of physical capital are employed along with a unit of labor, then average output produced per worker will increase initially at an increasing rate, and later, it will increase at decreasing rate. An increase in physical capital, that is, quality of capital can be shown as movement along the per-worker production function. Slope of per-worker production function The per-worker production function slopes upward because of law of diminishing marginal returns from capital. Law of diminishing marginal returns from capital states that initially more capital per worker would increase the average output per worker at an increasing rate, and later, the average output per worker will increase but at a diminishing rate.

Factors that affected the growth of labor productivity during 1973-1982 During 1973-1982, the growth of labor productivity has slowed down mainly due to the hike in oil prices by Organization of Petroleum Exporting Countries (OPEC). Hike in oil prices triggered inflation, which further resulted in stagflation (slow economic growth along with relatively high unemployment, which is accompanied by inflation). During 1973-1982, hike in oil prices also occasioned three recessions in the U.S. economy. Another reason for the slow growth rate of labor productivity was federal legislation. In the early 1970s, federal legislation has made necessary provisions of environment protection and improvement of the work place security, which slow down the labor productivity.

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