Anyone care to explain their mutual interaction?
I'm doing a paper on labor productivity and total productivity (multifactor productivity, if you wish). And looking at some statistics, I can't quite connect the two. Say the labor productivity drops as total number of worker increases (diminishing returns?) while total productivity continues to rise (as you would expect when a business grows). But I'm not quite connecting the two together - how can the indicators move inversely to each other?
With the numbers that I have at hand, I've also come to find that labor productivity eventually starts increasing again which I quite can't explain. More capital invested as a firm gets larger can perhaps be accounted for that?
Sometimes a business will experience growing pains. You can only increase worker productivity so much. If workers are being asked to do more, but don't have the resources, you could see lowering productivity. However, they could become more productive again once they have those resources.
Thank you for the reply. I understand that without further investments in new equipment and production techniques, output per worker can't increase for too much longer when more labor force is used.
However, what I was really wondering how it is that total productivity - that is output divided by all input - can still grow even when labor productivity starts dropping during a firm's growth process. That would imply that some inputs are still decreasing during the process. This of course is a wild guess, but I would assume that inputs such as electricity costs and other services are more efficiently used as a company evolves?
Eventually, obviously, a large enough company would be able to make the necessary investments for more capital intensive production, which would explain why labor productivity starts an upwards trend again. Am I on the right track here?