What Is the One-Third Rule?
Let me explain the one-third rule directly: it's a straightforward estimate for how changes in capital allocated to labor affect productivity. You use this rule to figure out the effects of shifts in technology or capital on overall production.
Key Takeaways
- The one-third rule is a rule of thumb that estimates the change in labor productivity based on changes in capital per hour of labor.
- The rule is used to determine the impact that changes in technology or capital have on production.
- The more goods and services a laborer can produce in an hour of work, the higher the standard of living in that economy.
- It can be hard to obtain more human capital, especially in countries that have a lower participation rate, or percentage of the population participating in the labor force.
Understanding the One-Third Rule
You need to know that labor productivity is an economic measure of a worker's hourly output cost, tied to the gross domestic product (GDP) generated per hour worked. Specifically, the rule states that a 1% increase in capital spending per labor hour results in a 0.33% productivity boost. This assumes all other factors stay the same—no shifts in technology or human capital, where human capital means the skills and knowledge workers possess.
With the one-third rule, you can gauge how much technology or labor drives total productivity in an economy or business. For instance, if a company sees a 6% rise in capital per labor hour over a period, meaning higher costs to employ workers, and its physical capital stock also grows by 6%, you apply the formula: % Increase in Productivity = 1/3 (% Increase in Physical Capital/Labor Hours) + % Increase in Technology. From this, you deduce that 4% of the productivity gain comes from technology improvements.
Important Consideration
When a nation lacks sufficient human capital, it has to prioritize building it through immigration, incentives for higher birth rates, or by ramping up capital investments and new technology developments.
Factors That Affect Labor Productivity
Measuring labor productivity accurately isn't always straightforward. You can easily link it to goods produced in a factory hour, but valuing services is tougher—think about quantifying an hour of a waitress's, accountant's, or nurse's work. Statisticians approximate dollar values, but without physical products, precision is elusive.
An uptick in a country's labor productivity drives growth in real GDP per person. Since productivity reflects goods and services produced per labor hour, it signals the economy's living standards. Take the Industrial Revolution in Europe and the US: fast industrial tech progress let workers boost hourly output dramatically, raising living standards as higher production meant better wages.
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