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Unformatted text preview: >> Long-Run Economic Growth Section 2: The Sources of Long-Run Growth chapter 8 Long-run economic growth depends almost entirely on one ingredient: rising produc- tivity . However, a number of factors affect the growth of productivity. Lets look at why productivity is the key ingredient, and then examine what affects it. The Crucial Importance of Productivity Sustained economic growth occurs only when the amount of output produced by the average worker increases steadily. The term labor productivity, or productivity for short, refers to output per worker. (Where data are available, productivity is defined as output per hour . This is often a useful statistic for comparing countries productiv- ities because the number of hours worked by an average worker often differs across countries.) For the economy as a whole, productivity is simply real GDP divided by the number of people working. You might wonder why we say that higher productivity is the only source of long- run growth. Cant an economy also grow its real GDP per capita by putting more of Labor productivity, often referred to sim- ply as productivity, is output per worker. the population to work? The answer is Yes, but. For short periods of time an econ- omy can experience a burst of growth in output per capita by putting a higher per- centage of the population to work. Thats what happened in the United States during World War II, when millions of women entered the paid workforce. The percentage of adult civilians employed outside the home rose from 50% in 1941 to 58% in 1944, and you can see the resulting bump in real GDP per capita during those years in Figure 8-1. But over the longer run the rate of employment growth is never very different from the rate of population growth. Over the course of the twentieth century, for example, the population of the United States rose at an average rate of 1.3% per year and employ- ment rose 1.5% per year. Real GDP per capita rose 1.9% per year; of that, 1.7%that is, almost 90% of the totalwas the result of rising productivity. In other words, only about 10% of the increase in U.S. real GDP per capita during the twentieth century was due to population growth. In general, overall real GDP can grow because of population growth, but any large increase in real GDP per capita must be the result of increased out- put per worker . That is, it must be due to higher productivity. So increased productivity is the key to long-run economic growth. But what leads to higher productivity? Explaining Growth in Productivity There are three main reasons that the average U.S. worker today produces far more than his or her counterpart a century ago. First, the modern worker has far more physical capital , such as machinery and office space, to work with. Second, the mod- ern worker is much better educated and so possesses much more human capital....
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