Principles of Macroeconomics / Unit 4 MAC 0307 worked example, 60 to 90 seconds
Productivity or Participation?
The idea
GDP per capita can rise for two different reasons, and telling them apart matters. It rises if each worker produces more, which is productivity growth. It also rises if a larger share of the population works, which is a participation effect, even with productivity flat. To tell which is happening, compare output per worker with output per person. If output per worker is rising, productivity is doing the work. If output per worker is flat while output per person rises, more people are working rather than each working more productively. Only the first can continue indefinitely.
In practice
Worked example: a country's output per person rises ten percent over a decade while output per hour is unchanged. Nobody became more productive; more of the population took jobs. That can happen once, as a generation enters the workforce, but a participation rate cannot rise past one hundred percent, so the source runs out.
Where people slip
This is why an aging population worries economists. As the share of people working falls, output per person can fall even while every worker becomes more productive, and productivity has to rise faster to offset it.
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