“Productivity isn’t everything, but in the long run it is almost everything. A c
ID: 1152937 • Letter: #
Question
“Productivity isn’t everything, but in the long run it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker. World War II veterans came home to an economy that doubled its productivity over the next 25 years; as a result, they found themselves achieving living standards their parents had never imagined. Vietnam veterans came home to an economy that raised its productivity less than 10 percent in 15 years; as a result, they found themselves living no better - and in many cases worse -than their parents.”
Paul Krugman, The Age of Diminished Expectations: US Economic Policy in the 1990’s, (third edition, 1997)
In the light of this statement explain why growth in labour productivity is so important in achieving rising living standards. Is the need for growth in labour productivity likely to be more or less important in Australia over the next twenty years?
Explanation / Answer
The increased labour productivity implies higher output produced per worker. Thus, increased labour productivity leads to increase in wages due to increased labor demand. This increase in wages is long-lasting i.e. there will be a permanant increase in wages. The permanant increase lead to increase in consumption rather than a temporary increase which induces savings and this increased consumption increases standard of living in the society.
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