Question

Is the following statement TRUE, FALSE or UNCERTAIN, and explain?

If labor becomes more productive it reduces its long run share of national income because fewer workers are

required to produce more output and this thereby reduces the overall demand for labor.

Answer 1

The above statement is absolutely false.

It's rightly said that when the productivity of labour increases it might lead to decrease in its long run share of national income because fewer workers are required to produce more output which ultimately reduces demand for labour. This is the one side story which gets compensated by the other side story.

The other side is that rise in productivity leads to increase in the overall income of the people which leads to increase in the demand for goods and services .Increase in the aggregate demand in an economy leads to rise in production of goods and services. For larger production of goods and services more resources like human resource are employed in order to fulfill the desired demand in the economy. In this way increase in productivity also lead to increase in employment level.This side of economy is more dominating than the other side so, it ouweighs the negative impact that increase in productivity has on the demand for labour.