Labour Productivity as a Measure of Technological Change

Average labour productivity (ALP) is today the productivity measure most used by policy makers, the media, and the general public. Economists recognize however that it is an inadequate measure of technological change. This is because ALP is a hybrid measure that captures both shifts in the production possibilities frontier and movements along the frontier itself. Thus, the flaw of ALP as a measure of technological change is not that it uses labour as a benchmark, which is a perfectly appropriate, but that, by being a partial measure of productivity, it ignores the role of capital, not just when accounting for technological change, but, even much more seriously, in production altogether. Put in other words, the numerator of the ALP ratio is not consistent with its denominator as a measure of technological change, and it is not the denominator that is at fault, but the numerator. A complete, or total measure of labour productivity (TLP) is therefore proposed and compared to the ALP and the better-known total factor productivity (TFP) measures. The relationship between the three productivity measures can also be analyzed in the dual price space. Numerical results for the U.S. private nonfarm business sector are provided as an illustration.