Economic Effects of Labor Productivity

An increase in labor productivity potentially has two direct economic effects, based on its definition: an increase in output quantity and a decrease in labor time.

However, the technological changes that underlie productivity changes also have two indirect effects: higher technological intensity and changes in natural cost.

Several of these effects will have further consequences. Changes in labor time and technological intensity will modify labor cost. These labor cost changes, in conjunction with any natural cost changes, will modify input cost.

All of these direct and indirect effects, plus their consequences for input cost, are depicted in the following figure.

Economic effects of rising labor productivity
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The four effects of rising labor productivity (LP) are higher output quantity, lower labor time, higher technological intensity, and higher or lower natural cost. The last three effects will modify input cost.

In this figure an arrow is placed beside a factor if its response to an increase in productivity is known. Where this is unknown, the arrow is absent.

At the top of the figure are the two direct effects of rising productivity: increased output quantity and decreased labor time. The output’s potential value is assumed to be positive, so increased quantity results in higher potential value (not shown).

Decreased labor time could refer to either fewer workers or a shorter work-day.

However, ENL's approach to worker participation means that, for a constant output quantity, the number of workers should be maximized in order to minimize overall labor cost. It is therefore assumed that the number of workers has been maximized, and that a decrease in labor time refers to a shorter work-day.

Whether higher productivity results in greater quantity, a shorter work-day, or some combination of the two is a social choice, based on the economic considerations identified below and any relevant non-economic considerations.

Because standard thought applies capitalism's productivist logic to this question, it generally seeks to increase quantity in order to raise a society’s “standard of living”.

From ENL’s perspective, of course, increased quantity does not necessarily result in greater well-being. For a rational economy, a shorter work-day will in many cases be a superior alternative to more outputs.

An excellent example of such a choice is provided by Clive Ponting in A Green History of the World:

Earlier this century [i.e., the 20th] the Siane tribe in New Guinea adopted modern steel axes instead of their traditional stone tools. This reduced the amount of time needed to provide an adequate level of subsistence by about a third. The new spare time was not spent in increasing output but was devoted to ceremonies, leisure, and warfare.1

Returning to the preceding figure, the first indirect effect of higher productivity is increased technological intensity. Combined with a shorter work-day, this modifies labor cost, which in turn modifies input cost.

The second indirect effect is either an increase or a decrease in natural cost. For example, a new technology for extracting bitumen from the Alberta tar sands may inject toxins into the Athabasca River, thereby endangering the health of native people living downstream. This is an increase in natural cost.

On the other hand, improved technology could reduce the greenhouse gases being emitted from the tar sands sites, thus reducing natural cost. Any such changes are added to the changes in labor cost to further modify input cost.

As shown by the absence of an arrow in the figure, the overall effect of these factors on input cost is indeterminate — that is, it depends on concrete conditions.

A tentative conclusion can nevertheless be drawn about the historical trajectory of input cost, and thus the behavior of the input cost curve over time. Increased technological intensity will likely cause labor cost to first decrease and then to increase.

Further, if a long work-day becomes shorter, labor cost will almost certainly decline, thus accentuating the down-then-up behavior of the labor cost curve. The trend for labor cost over time is therefore relatively clear.

The impact of increased productivity on natural cost depends on the technological changes made, so we must be careful about drawing specific conclusions. However, a historical trajectory is again evident.

Over the long term, technological changes have been accompanied by an increase in resource extraction and waste expulsion. It is also clear that levels of toxins and other pollutants in the environment have risen sharply over time.

Therefore, a reasonable generalization is that natural cost tends to rise with productivity.

Combining the trends for labor cost and natural cost, we can provisionally state that, as productivity rises over time, the input cost curve first moves slowly down, reaches a minimum, and then moves rapidly up.

This behavioral pattern is assumed in the discussions on optimizing productivity and division of labor, but it can easily be modified if the analyst determines that the assumptions made do not apply in specific circumstances.

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