Why is productivity related to the standard of living

A weekly presentation of downloadable charts and short analyses designed to graphically illustrate important economic issues. Updated every Wednesday. Labor productivity is a measure of the amount of goods and services that the average worker produces in an hour of work. Living standards can be measured in different ways, but one good indicator for measuring national living standards is the average annual growth in the inflation-adjusted income of the typical American family.

Ideally, in an economy in which workers share in the fruit of their labor, annual income growth should track productivity growth. To take a historical example, consider the economy of the United States in By , only 1. On a percentage basis, agriculture consumed about 60 times as much labor in However, agricultural output is significantly higher today than in the 18th century. That makes food prices much lower today in real terms , and it frees up workers for other tasks.

That is the way economic growth takes place when technology raises the productive capabilities of the people. Growth in productive capital requires periods of underconsumption. Producers must devote less energy toward making consumable goods so they can build and use new capital goods. For instance, an office worker cannot create web content while setting up a new computer. These periods of underconsumption need to be funded, which is why businesses need investment for new capital projects.

Ultimately, consumers must delay their own satisfaction to supply funding for companies in exchange for more consumption in the future. That is how capital investment leads to higher productivity and future economic growth.

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