Research Desk investigates: How has the role of capital and labor in determining output changed?
By Dylan Matthews
Years ago I read that the division of productivity gains in the U.S. from WWII to 1973 was 70% labor, 30% capital. Then it reversed to 30% labor, 70% capital. Was, and is, that true? And, if true, how much does that account for the rising inequality of wealth? (Also, while we measure that inequality by income, wouldn't it be more revealing to measure by net worth?)
Before I get into this, it's worth defining our terms. Capital refers to resources a company holds in money, investments, infrastructure, material goods and so forth. Labor refers to how many employees it has and how much they work. Capital gets more productive when a company uses the same resources to produce greater output, and labor gets more productive when the same number of workers working for the same number of hours produces greater output.
Labor productivity is thus measured by dividing output by the number of hours worked, and capital productivity by dividing output by the amount of capital held. The third type of productivity, multifactor productivity, is measured by dividing output by both labor and capital, and tracks how the two factors interact with each other.
The Bureau of Labor Statistics keeps data (2008 release here, ZIP archive with historical data here) on the yearly change in the contribution of labor and capital to productivity growth. This graph tracks the difference between the growth rate for capital's contribution, and the growth rate for labor's contribution.
Only nine years saw labor's contribution to productivity growth grow more than that of capital. Thus, capital's contribution to productivity has been growing at a much sharper clip than labor's, indicating that, as fredbrack says, productivity gains are based more and more on changes on the capital side.
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