How to explain the productivity paradox?

Question

When a country is 4 times richer than another (per capita), it is reasonably to say that an average worker of the poorer country takes one hour to finish a job, which is done by an average worker of the richer country in 15 min.

But on the other hand, if we compare typical jobs as dentists, nurses, drivers, teachers, waiters, and other service jobs, it seems false. Normally, there are no much difference in the time to perform a service or in the relation worker x num. of customers. As most people work in the service sector, the main source of the differences in the productivity should be there. But apparently it is not so.

So, maybe the differences are in the industrial sector. But here again loads are carried by cranes and not on the shoulders of dozens of people, even in poorer countries. And a steel rolling mill is electric driven both in Germany and in Peru. So, it is not easy to see an average four times productivity gap.

Maybe the difference are in the agriculture. But here also, a country like Brazil has a few percentage of people in this sector, while producing and exporting a large surplus. The difference is probably not there.

How to explain huge gaps in income per capita if the labour productivity is about the same everywhere?

Answer 1

There is already a major flaw in the assumption in your first sentence: "..., it is reasonably to say that an average worker of the poorer country takes one hour to finish a job, which is done by an average worker of the richer country in 15 min." That is not true simply because the richer country is not producing the same goods as the poorer one and not in the same proportions.

A lot of goods and services are produced in both countries. For some of them, for example hair dressers the productivity per labour hour is very similar between a rich and poor country. For others, for example large parts of agriculture, different levels of mechanization lead to vastly different amounts of productivity. Maybe the poor country has 20% of the working population in agriculture and the rich one has only 2%, although both produce a similar amount of food in total.

But it is the 18% of the labor force in the rich country not needed in agriculture that drives most of the wealth difference. They are producing high tech goods or provide services that are just not produced in the poor country at all or in much smaller quantities. Maybe the poor country has 1% of working population with engineering degrees and the rich country has 10%. Per engineer the productivity doesn't need to be that different. It is the larger quantity of high productivity jobs that explains the overall wealth difference.

Answer 2

How to explain huge gaps in income per capita if the labour productivity is about the same everywhere?

This question is based on a false premise that labor productivity is about same everywhere. Data clearly show that there are huge labor productivity differentials between different countries (e.g. see our world in data). For example, labor productivity in US according the data is about 7x the labor productivity in China.

There are different measures of productivity, but I am not aware of any, generally used, measure that would show that productivity is about the same everywhere, that is prima facie absurd statement given the amount of evidence to contrary.

Most measures of productivity are some version of output/input or output(input) where higher output or lower inputs or some combination of higher output and lower input means higher productivity.

From the broad economic perspective the relevant output is value, typically measured in some currency, because this makes different goods in different sector comparable. Inputs are some measures of factors such as labor or others that resulted in the output.

As a consequence, higher productivity is not just about making things faster. If a worker creates more valuable cake at the same time some other worker creates less valuable cake, then even though they both create 1 cake the first worker is considered more productive.

Moreover, productivity does not depend just on worker or firm, if for example, country doesn't have reliable electric grid, or too much criminality and the cake never gets to customer, then productivity of the worker is nil, and that would be also reflected in most common productivity measures.

Next, benefits of productivity increases in one field spill over into other fields via well known Balassa-Samuelson effect. If tradable manufacturing in country A gets more productivity, then this results in higher wages in non tradable sectors such as hairdressing, because these two sectors compete for the same pool workers.

This is why in high productivity countries wages raise even for workers in sectors where there aren't any changes to production processes. However, that is not the same as claiming that the productivity is everywhere the same.

Also there isn't any paradox to explain. If you look at cross sectional data, the productivity and incomes are almost on straight line, hence most variation in incomes is due to differences in productivity. You can see the chart below I got from Raihan.

Answer 3

But here again loads are carried by cranes and not on the shoulders of dozens of people, even in poorer countries. And a steel rolling mill is electric driven both in Germany and in Peru. So, it is not easy to see an average four times productivity gap.

Here the problem is that you assume that all the countries have the same amount of cranes and other equipment.

Infrastructure, availability of energy and availability of equipment are not equal for all the countries.

Simply looking at hoe the energy use is distributed around the world you can see that there are huge differences.

Infrastructure inequalities cannot be shown by a simple link because it is a term that includes too many different variable, but if you search rail or road transport networks, electricity distribution networks, port infrastructure by country you can get an idea.