How Productivity Affects Unemployment

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  • 0:01 Productivity and Unemployment
  • 0:30 Short-Run Increases in…
  • 1:49 Drops in Productivity
  • 3:13 Long-Run Increases in…
  • 4:18 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught history, and has an MA in Islamic law/finance. He has since founded his own financial advice firm, Newton Analytical.

Increases or decreases in productivity can affect employment rates. Find out how productivity and unemployment are connected in this lesson as you look at different situations that may occur in an economy.

Productivity and Unemployment

Imagine that you have a job at a factory making widgets. Everything is going great - you are employed, and you are productive. Now, expand this out to an entire economy. Everyone is employed making widgets, and everyone is productive. In short, life is good.

However, what if something happens to change either the amount of productivity or the amount of employment? In this lesson, we're going to take a look at some of those potential actions, as well as their impacts on both productivity and employment.

Short-Run Increases in Productivity

So, you are happily working away in your widget station when you realize that if you hit the widget only once with the hammer, it will have the same effect as if you hit it twice, like your supervisor asked you to do. You bring this to your boss's attention, and they are delighted because this means that they can produce more widgets in the same amount of time.

In short, you have just caused an innovation to happen. An innovation occurs when there is something done to cause an increase in productivity. For you and the factory, that is a good thing because that means that more widgets can be produced, which means more widgets can be sold, which means that your job is now more secure. In fact, you may even get a raise out of it!

However, for your cousin across town, it's not such a good thing. He too hammers widgets and wasn't quite able to figure out that one hit is as good as two hits. Neither was anyone else at his factory. As a result, they are being out-competed by your factory.

Eventually, because they are less productive, they shut down production. Your cousin is now out of a job. Such short-run increases in productivity often result in unemployment. It's not that your cousin was any less of a widget hammerer than you were; it's just that your company innovated, and his didn't. To this end, innovation keeps a company from losing jobs in the short run.

Drops in Productivity

You would be a good family member and check in on your cousin, but it seems that there's a problem at your factory. Your number one supplier has just called the factory owner saying that due to problems in the mining process, the raw materials for widgets will not be of the same high quality as they were before. In fact, whereas one hammer strike fixed the widget before, now three will be necessary due to the inferior quality of the raw materials.

Frustrated, you take out your anger about the poor quality of the widget components as you work, swinging your hammer harder and faster, but then a hammer swing with too much frustration breaks the widget shaper behind you! It will take a week to get it fixed, during which time no widgets can be made at your factory! As a result, there is a massive drop in productivity.

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