One-Third Rule

What Is the One-Third Rule?

The one-third rule estimates change in labor productivity in light of changes in capital committed to labor. The rule is utilized to determine the impact that changes in technology or capital have on production.

Figuring out the One-Third Rule

Labor productivity is an economic term that depicts the cost of a worker's hourly production in light of the amount of gross domestic product (GDP) spent to create that hour of work. Specifically, the rule declares that for an increase of 1% in capital expenditures to labor, a subsequent productivity increase of 0.33% will occur. The one-third rule further accepts that any remaining factors stay static. Thus, no changes in technology or in human capital happen. Human capital is the information and experience a worker has.

Utilizing the one-third rule an economy or business might estimate how much technology or labor adds to overall productivity. For instance, say a company experiences a 6% increase in capital for an hour of labor for a given period. As such, it costs more to utilize workers. Simultaneously, the company's stock of physical capital additionally increased by 6%.

Utilizing the equation % Increase in Productivity = 1/3 (% Increase in Physical Capital/Labor Hours) + % Increase in Technology, one could surmise that 4% of the increase in productivity was due to headways in technology.

At the point when a nation has a shortage of human capital, it must either zero in on expanding human capital through migration and offering incentives to raise rates of birth, or on expanding capital investments and growing new mechanical headways.

Factors That Affect Labor Productivity

Labor productivity can be difficult to accurately measure. While it's sufficiently simple to draw an association between the number of goods created by factory labor in one hour of work, for instance, putting a value on service is more diligently. How much is an hour of a server's time worth? And an hour of an accountant? And a medical caretaker? Analysts can estimate the dollar value of labor in these callings, yet without substantial goods to assess, a careful valuation is unthinkable.

An increase in a nation's labor productivity will, thus, make growth in the real GDP per person. Since productivity demonstrates the number of goods an average worker can deliver in one hour of labor, it might give signs to a country's standard of living.

For instance, during the Industrial Revolution in Europe and the United States, fast industrial mechanical advances permitted workers to make great gains in their hourly productivity rates. This increased production prompted higher standards of living in Europe and the United States. As a general rule, this happens on the grounds that, when laborers can deliver more goods and services, their wages increase, too.

Features

• The rule is utilized to determine the impact that changes in technology or capital have on production.
• The one-third rule is a rule of thumb that estimates the change in labor productivity in view of changes in capital each hour of labor.
• The more goods and services a laborer can deliver in an hour of work, the higher the standard of living in that economy.
• It very well may be difficult to get more human capital, particularly in countries that have a lower participation rate, or percentage of the population participating in the labor force.