If capital per hour of labor grows by 3 percent a year and labor productivity grows by 1.5 percent a year, the one third rule says that the growth in labor productivity can be divided so that capital growth accounted for percentage points and technological change accounted for percentage points.

Question

Quizplus · Accepted Answer

According to the one third rule, labor productivity growth can be divided into three parts: capital growth, technological change, and residual (unexplained) growth.

If capital per hour of labor grows by 3 percent a year and labor productivity grows by 1.5 percent a year, then the residual growth would be 1.5 percent (since 3% - 1.5% = 1.5%).

Using the one third rule, we can divide the 1.5% labor productivity growth between capital growth and technological change. Since capital growth is assumed to be one third of the total growth in labor productivity, it would account for 0.5 percentage points (or one third of 1.5%).

The remaining 1.0 percentage points (or two thirds of 1.5%) would be accounted for by technological change. Therefore, the correct answer is A) 1.0; 0.5.

If Capital Per Hour of Labor Grows by 3 Percent