Question

Explain why there is such a close relationship between changes in a nation’s rate of productivity growth and changes in its average real hourly wage.

Short answer

Productivity growth is linked to real output, real income, and real wages. An increase in the rate of productivity growth will increase labor productivity, which improves the average real hourly wage of the economy and vice-versa.

Step-by-step solution

Step 1. Meaning of productivity growth and average real hourly wage.

Productivity growth: Productivity growth is defined as the opportunity of an economy to increase output without increasing the inputs. An increase in productivity growth increases the production of more goods and services at the same amount of work.

Average real hourly wage: It depends on the amount of output generated by the economy in an hour. It is also termed as average output per hour.

Step 2. Understanding the relationship between the rate of productivity growth and changes in its average real hourly wage.

By this meaning, productivity growth is the opportunity to increase the output without increasing the input. If there is an increase in the output level using the same amount of input, it shows that labor productivity has increased.

Since labor productivity is linked with real output, real wages, and real income, an increase in the rate of productivity growth will increase the economy’s average real hourly wage. And a decrease in the rate of productivity growth decreases the average real hourly wage.