Labor productivity is the key to our standard of living, as we said in our recent article. In this one we discuss determinants of productivity and its forecast.

Labor productivity is determined by three factors: labor quality, capital, and everything else, usually called total factor productivity.

Labor quality varies, to nobody’s surprise. Some workforces are highly educated and experienced, others not so much. One critical factor is age of the workforce. In the United States, the baby boom generation entered the workforce in the late 1970s and early 1980s, causing some of that era’s productivity slowdown. Younger people tend to be less productive for two reasons. First, they are less likely to be in a job for which they are well suited. This is the reason there is so much job changing among younger workers; they are trying to find their most productive  roles. Second, younger workers have less experience. As workers age, their productivity goes up. Currently the U.S. economy has a large number of Millennials, which is one reason for our low productivity growth.

Not much can be done about the age mix of the population, but education can be improved to boost productivity. Literacy hugely helps productivity, as does general education. For advanced economies, the quality and usage of universities is important. Education of non-workers is also important, as educated mothers raise more productive sons and daughters.

The second major element of labor productivity is capital: the tools available for workers. A shovel helps a ditch digger, but a backhoe helps even more. Machinery, transportation equipment and computers help virtually every worker be more productive. Some workers directly use these tools, but others are indirectly helped, as when manual laborers are more efficiently scheduled thanks to information technology.

For emerging economies, simple quantity of capital is critical. China’s economic growth owes a lot to “capital deepening,” having more tools for each worker.