One Third Rule – Definition

Cite this article as:"One Third Rule – Definition," in The Business Professor, updated August 6, 2019, last accessed May 30, 2020, https://thebusinessprofessor.com/lesson/one-third-rule-definition/.

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The one-third rule gives an estimate about the change in the productivity and effectiveness of labor owing to changes in capital. In other words, this rule enables one to figure out how changes in technology or capital will affect the production levels.

A Little More on What is the One-Third Rule

Labor productivity is an economic terminology that informs about the costs related to the production levels that a worker makes on an hourly basis. The basis for calculating this cost involves the GDP or gross domestic product incurred for that hourly production of work. According to the one-third rule, if there is a rise in 1% capital expenditure to labor force, it will result in an increase of productivity of 0.33% assuming that all other variables or factors are constant. Hence, there are no changes occurring in either human capital (the extent of experience a worker holds) or technology.

It can be difficult to calculate labor productivity exactly. Though it can be easier to strike a relation between the quantum of goods or products that the factory labor manufactures in an hour, it gets complicated to find a value for a service. For instance, it would be hard to ascertain the value of a hostess’s time for one hour. And, the same thing goes with accountants, nurses, and so on. It is possible for statisticians to predict the dollar value of labor that these professions have. But in the absence of physical goods, it is not possible to do the valuation accurately.

Calculations with the One-Third Rule

With the help of the one-third rule, one can know the impact that technology or labor has on the overall productivity of the nation. For instance, a business firm encounters an increase of 6% in its capital if the labor is employed for one hour for a specified period of time. It means that the costs associated with employing labor force is more, and also, the physical capital of the organization also rose by 6%.

For knowing that the rise of 4% in productivity was the result of improved technology, one can use the equation of percentage increase in productivity, that sums the % increase in physical capital divided by labor hours and % rise in the technology.

Key points

  1. The one-third rule observes what change in labor productivity will take place, if there are changes in human capital for every hour.
  2. If a laborer produces more products and services in one hour, it indicates that the economy has a better standard of living.
  3. The nations with a poor participation rate can find it difficult to get more labor force.

The Fundamentals of the One-Third Rule

If a country experiences a rise in labor productivity, it will result in more real GDP for every individual. As productivity is related to the quantum of products that a worker on an average can manufacture on an hourly basis, it indirectly offers an idea about the standard of living of a nation.

For instance, when the industrial revolution took place in Europe and the United States, quick advancements in technology helped labor force in obtaining huge gains in their hourly rates of production. This ultimately resulted in better standards of living in the U.S. and Europe. In other words, this situation usually takes place as when workers start manufacturing more products and services, their wage rates rise as well.

Real World Example

For instance, as per the statistics issued by Trading Economics.com, the participation rate of the population of Japan is merely 37% lower than that of the U.S. which is 63%.

A country struggling with lesser human capital can increase it through immigration and providing benefits to increase birth rates. Or, it can also emphasize on investing more in capital or making innovations in technology.

References for “One-Third Rule

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