Due suhday 07.22.18 at 11:00 PM Attempts: Do No Harm: /3 3. The rule of 70 AaAa?

Question

Due suhday 07.22.18 at 11:00 PM Attempts: Do No Harm: /3 3. The rule of 70 AaAa? The lifetime real income of most workers is determined by the real compensation they receive for their labor. (Even if a worker earns investment income later in life, it is typically the result of saving from employee compensation earlier in life.) Labor productivity growth, which tracks growth in real compensation, is, therefore, a better indicator of changes in standards of living than GDP growth or even growth in GDP per capita. GDP equals hours worked times labor productivity. This means that growth in GDP (defined in terms of percentage change) is approximately equal to growth in hours worked plus growth in labor productivity. Even if labor productivity and average hourly compensation stay constant, GDP in an economy could grow because of growth in hours worked. GDP per capita can also grow, even if the productivity stays the same. Hours worked might go up as people who did not work before enter the labor force. In this case, GDP and GDP per capita would grow, but the average hourly compensation paid per hour worked would stay constant. Because it is proportional to growth in real wages, growth in labor productivity is the best indictor of changes in standards of living. Economists use the rule of 70 to quickly calculate the number of years required for a variable to double at a given growth rate. If the variable grows at the rate x% per year, then 70 divided by x (drop the percent) tells you the number of years it takes for this variable to double.

Explanation / Answer

If the average employee compensation grew at the rate of 3.5% per year, it will take 70/3.5 = 20 years for it to double.

If labour productivity grows at the rate of 1.4% so it will be double around in 50 years. Total difference in years is 100 years. So in 100 years there will be 37*2 = 74 and in 100 years it will be $74*2 =$148.

If labour productivity grows at a 3.5% then it becomes double in every 20 years. So in 100 years it will be 10 times. Therefore in the year 2100 wage will be 10*37 =$370.

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