Question

1. According to the International Labour Organization (ILO) labour productivity is an important economic indicator that linked to economic growth. Discuss the relationship between productivity and economic growth.

b. Using diagram(s) explain the effect of non-labour income on the supply of labour.

Answer 1

Long term economic growth is an outcome of increased labour productivity. Labour productivity refers to the value created by the employed person through her per unit of input. Productivity also implies that labour take less time to produce a similar good when compared with other labour. The time/resources saved can be used to produce another good. Labour productivity can be estimated form the following factors

1. Human capital which refers the skill set and expertise the average labour in an economy possess.

2. Economies of scale - where the firm obtains cost advantage by the size of firm

One measure of economic productivity is GDP per capita although not a perfect measure. In the production function the output of GDP and inputs are land labour capital and technology. Over the long term the sure shot way that GDP continues to grow is when labour productivity increases

B. An increase in non labour income leads to parallel shift outwards of the budget constraint.

Leisure / non labour income is considered a normal good which will result in decrease in working hours

Here If an employee generates extra $2 of non labour income the budget constraint shifts forwards and leisure hours rises to 6 at point B. Which reduces the supply of labour.