Question

Explain how an increase in technology, which increases the productivity of labor, will affect the labor market, the production function, and aggregate output. Provide graphs to illustrate.

Answer 1

Labor productivity is the value that each employed person creates per unit of his or her input. In other words labor productivity measures the constantly output of the country's economy. The growth in labor productivity depends on three main factors: human capital, savings and investment in physical capital, and new technology.

Labor productivity also known as workforce productivity, is defined as real economic output per labor hour. Growth in labor productivity is measured by the change in economic output per labor hour over a defined period. Human Capital is the accumulated knowledge (from education and experience), skills and expertise that the average worker in an economy possesses. Physical capital is the tools, equipment, and facilities that workers have available to use to produce goods. Technological change is a combination of invention-advances in knowledge-and innovation, which is putting that advance to use in a new product or service.

Labor productivities directly linked to improved standard of livings in the form of higher consumption. New technologies are new methods to combine inputs to produce more output, such as assembly lines or automation. Developing new technologies, including hard technology like computerization or robotics and soft technologies like new modes of organizing a business or pro-free market reforms in government policy can increase work productivity.

The aggregate production function describes how total real Gross Domestic Product (real GDP) in an economy depends on available inputs. Aggregatre output (real GDP) depends on physical capital, labor, human capital, knowledge or technology, social infrastructure the amount of natural resources available in market etc.

Technology means that for a given level of the capital stock, more output is produced: the production function shifts upward as technology increases. Further, as technology increases, the production function is steeper: the increase in technology increases the marginal product of capital.