Daniel l. Rubinfeld

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186 Part 2 Producers, Consumers, and Competitive Markets labor inputs are of equal quality; diminishing marginal returns results from lUnitations on the use of other fixed inputs (e.g., machinery), not from declines in worker quality. In addition, do not confuse diminishing marginal returns negative returns. The law of diminishing marginal returns describes a deer marginal product but not necessarily a negative one. The 18'1'\' of diminishing marginal rehlrns applies to a given production technology. Over time, however, inventions and other improvements in technology may allow the entire total product curve in Figure 6.2(a) to shift upward, so that more output can be produced with the same inputs. Figure 6.3 illustrates this principle. Initially the output curve is given by °1 , but improvements in teclmol_ ogy may allow the curve to shift upward, first to °2, and later to 03' Suppose, for example, that over time, as labor is increased in agricultural production, technological improvements are being made. These improvements might include genetically engineered pesticide-resistant seeds, more powerful and effective fertilizers, and better farm equipment. As a result, output changes from A (with an input of 6 on curve 01) to B (with an input of 7 on curve 02) to C (with an input of 8 on curve 0 3 ), TIle move from A to B to C relates an increase in labor input to an increase in output and makes it appear that there is not diminishing marginal returns When in fact there is. Indeed, the shifting of the total product curve suggests that there may not be any negative long-run implications for economic growth. In fact, as we can see in Example 6.1, the failure to account for long-run improvements in tedmology led British economist Thomas Malthus wrongly to predict dire consequences from continued population growth. emew Output per Time Period 100 && The law of diminishing marginall'eturns was cenh'al to the thinking of political economist Thomas Malthus (1766-1834).1 Malthus believed that the limited amoLmt of land on the globe would not be able to supply enough food as population grew and more laborers began to farm the land. Eventually as both the marginal and average productivity of labor fell and there were more mouths to feed, mass hunger and starvation would result. Fortunately, Malthus was 'wrong (although he was right about the diminishing marginal rehlrns to labor). Over the past century, technological improvements have dramatically altered the production of food in most countries (including developing countries, such as India). As a result, the average product of labor and total food output have increased. These improvements include new high-yielding, diseaseresistant strains of seeds, better fertilizers, and better harvesting equipment. As Table 6.3 shows, overall food consumption throughout the world has outpaced population growth more or less continually since the end of World War II.2 This increase in world agricultural productivity is also illustrated in Figure 6.4, which shows averag: cereal yields from 1970 through 1998, along with a world price index for food. o Note that cereal yields have increased steadily over the period. Because growth in agricultural productivity led to increases in food supplies that outstripped the growth in demand, prices, apart from a temporary increase in the early 1970s, have been declining. Some of the increase in food production has been due to small increases in the amount of land devoted to farming. From 1961 to 1975, for example, the percentage of land devoted to agriculture increased from 32.9 percent to 33.3 percent in Africa, from 19.6 percent to 22.4 percent in Latin America, and from 6 Production 87 YEAR INDEX 50 a 2345678 9 10 Labor per Time Period 1948-1952 100 1960 115 1970 123 1980 128 1990 137 1995 135 1998 140 I ~~ ~ J Labor productivity (output per unit of labor) can increase if there are improvements in the technology, even though any given production process exhibits diminishing retUTIlS to labor. As we move from point A on curve 0 1 to B on curve O 2 to C on curve labor increases. : Thomas Malthus, Essay all the Prillciple of Poplliatioll, 1798 ;/11 but the data for 1990, 1995, and 1998 appear as Table 4 .1 in Julian Simon, The Ultimate Resollrce . rmceton: Prmceton Uruversll)' Press, 1981). The original source for all the data is the UN Food and ~gnculture Organization, Prodllctioll Yearbook, and World Agriwltllml Sitllatioll. , Data are from the UN Food and Agriculture Organization and the World Bank. See also (select Agriculture, then under "Data Collection," select Crops Primary)
88 Part 2 Producers, Consumers, and Competitive Markets I 350 labor productivity Average product of labor for an entire industry or for the economy as a whole. 300 - - 250 0' 0' x 200 :.; v ..s :.; ~ 150 100 Price Index I 50 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 16 1970 1975 1980 1985 1990 1995 2000 l 3.0 2.8 2.6 2.-1 n rc .... Cl r.:J -< [ n. ".r. ~ ::l '" ~. 2.2 0 ~ :1 v: v '" .... ~ 2 .. 0 Cereal yields have increased steadily. The average world price of food increased has declined since. 21.9 percent to 22.6 percent in the Far East.~ During the same period, however, the percentage of land devoted to agriculture fell from 26.1 percent to 25.5 percent in North America, and from 46.3 percent to 43.7 percent in Western Europe. It follows, therefore, that most of the improvement in food output is due to improved teclmology, not to increases in land used for agriculhlre. Hunger remains a severe problem in some areas, such as the Sahel region of Africa, in part because of the lo'\\' productivity of labor there. Although other countries produce an agricultural surplus, mass hunger still occurs because of the difficulty of redistributing foods from more to less productive regions of the world, and because of the low incomes of those less productive Productivity Although this is a textbook in microeconomics, many of the concepts de\'eloped here provide a foundation for macroeconomic analysis. Macroeconomists are particularly concerned with labor productivity-the average product of labor for an entire industry or for the economv as a whole. In this subsection we discuss labor producti~ity in the United States and in a number of foreign COUlltries. This topic is interesting in its own right but will also help to illustrate one of the links between micro- and macroeconomics. Because the average product measures OUq.iut per unit of labor input, it is rel~ atively easy to measure (total labor input and total output are the only pieces at information you need). Labor productivity can provide useful comparisons -l See Simon, The Uitillzate Re5(l1ll"Cl', p 83. 1.8 Cl to IT S acrosS industries and for one industry O\'er a long period. But labor productivity is especially import~nt .bec~~lse it determines the real standard of fiIling that a untry can achIeve tor Its otIzens. c O . There is a simple link behveen labor pro~uctivity and the standard of living. In any particular year, the aggregate value ot go~ds and ~en'ices produced by an economy is equal to the payments made ~.o all i.actors ot production, including wages, rental payments to capital, and profIt to ~lrms. But consumers ultimately receive these factor payments, in the form ot wages, salaries, dividends, or interest payments. As a result, consumers in the aggregate can increase their rate of consumption in the long run only by increasing the total amount they produce. Understanding the causes of productivity growth is an important area of research in economics. We do knovv that one of the most important sources of growth in labor productivity is growth in the stock of capital-i.e., the total amount of capital a\'ailable for use in production. Because an increase in capital means more and better machinery, each -worker can produce more output for each hour worked. Another important source of o-rO\vth in labor productivity is o ~ technological change-i.e., the development of new technologies that allow labor (and other factors of production) to be used more effectively and to produce new and higher-quality goods. As Example 6.2 sho-ws, levels of labor productivity have differed considerably across countries, and so too have rates of growth of productivity. Understandinothese differences is important, given the central role that productivity has i~ affecting our standards of living" Will :he s:al~dard o~ living in the Ur:ited States, Europe, and Japan. cont~nue to 1111p1O\e, or Will these economIes barely keep future o-enerations trom • 0 being worse off than they are today Because the real incomes of consumers in these counh"ies increase only as fast as productivity does, the answer depends on the labor productivity of workers. As Table 6.4 shows, the level of output per person in the United States in 1997 was higher than in other industrial countries" But two patterns over the ~o~t-World War II period have been dishlrbing for Americans. First, productIvIty in the United States has grovm less rapidly than productivity in most UNITED FRANCE GERMANY JAPAN KINGDOM Output per Employed Person (1997) 554,507 $55,644 $46,048 $42,630 Years Annual Rate of Growth of Labor Productivity (%) 1960-1973 4.75 4.04 8.30 2.89 1974-1986 2.10 1.85 2.50 1.69 1987-1997 1.48 2.00 1.94 1.02 Chapter 6 Production 189 stock of capital Total amount of capital a\'ailable for use in production technological change Development of new technologies allowing factors of production to be used more effectively. UNITED STATES $60,916 2.36 0.71 1.09 IJ , ~
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Daniel l. Rubinfeld

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