Like most macroeconomic aggregates, labor productivity suffers from the problem of not being precisely correct. On the other hand, we know that there cannot be such a thing as a precisely correct aggregate measure of labor productivity, so aggregate labor productivity continues to be used in one of its various incarnations because being roughly correct is often of more use than being precise and incorrect.

That does not mean that there are no measurement issues raised by the precise details of the creation of the aggregate ... but rather that the critique of one of the aggregate measures should be framed as a relative comparison with another way of doing it.

So roughly speaking, if N is total employment and W the average wage rate, and (PQ) is nominal GDP (noting that the "real" GDP is nothing but (PQ)/P ... that is, it must be kept in mind that what looks like a product of two primitives is really the primitive, which is artificially divided into component factors) ...

(PQ) - NW

is the amount left over for payments to all other income claiments, whether their claim comes from property rights over plant and equipment, natural resources, or they are extracting a rent from an insider position in providing finance to the productive sector.

So labor share of GDP per capita is W, and the share of all other income claimants is {(PQ)/N}-W

Now, applying the artificial factor P, some price index, leaves the artifact Q, the nominal GDP "corrected for inflation", and the share of all other income claimants is P(Q/N)-W

Dividing by Price to work in values "corrected for inflation", (Q/N)-(W/P) is the per capita non-labor share of real national income and (W/P) the labor share.

That (Q/N) is labor productivity, which obviously rests on two pyramids of approximations, since both Q and N are artifacts, but on the other hand also expresses a fundamental point in the tug of war between labor and non-labor claimants on national income, that if labor productivity rises, it is possible for the real wage to rise without having to win a progressively rising share of national income for labor.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.