Problems in Economics

ISSN: 0032-9436 (Print) (Online) Journal homepage: http://www.tandfonline.com/loi/mpet19

The Relationship Between the Capital-Labor Ratio

and Labor Productivity

V. Vechkanov

To cite this article: V. Vechkanov (1984) The Relationship Between the Capital-Labor Ratio and
Labor Productivity, Problems in Economics, 27:1, 22-32

To link to this article: http://dx.doi.org/10.2753/PET1061-1991270122

Published online: 19 Dec 2014.

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V. VECHKANOV

The Relationship between the

Capital-Labor Ratio and Labor
Productivity*

The growth of labor resources is declining significantly in the

1980s. V. Perevedentsev estimates that the population between
the ages of 20 and 60 years will grow by 6.7 million persons
during the current decade, compared with 22.3 million in the
1970s. This trend will be felt even more keenly in the 1990s: the
number of persons between the ages of 20 and 60 years in our
country will be only 5.7 million more than in the preceding 10
years. Under these conditions the importance of increased labor
productivity naturally becomes even more significant. Under the
Eleventh Five-Year Plan this increase must account for 90% of
the increase in national income and industrial output and for the
total increase in output in agriculture and in construction and
instal lation work.
In order to increase labor productivity, it will first of all be
necessary to increase the technical equipment of production,
which in turn presupposes the corresponding investment of re-
sources. In other words, the saving of labor through increased
labor productivity is accomplished by expenditures of labor on
increasing the amount of capital per worker. Hence the important
economic problem of securing an optimal correlation between
society’s expenditures on increasing technical inputs per
*Russian text 0 1983 by “Ekonomicheskie nauki.” “Vzaimosviaz’
mezhdu fondovooruzhennost ’iu i proizvoditel ‘nost ‘iu truda,” Ekonomiches-
kie nauki, 1983, no. 7, pp. 43-48. Professor Vechkanov has a doctorate in
economics and lives in Leningrad.

22
 MAY 1984 23

worker-on increasing capital per worker on the one hand, and

the saving of social labor through its increased productivity on the
other.
In practice, different correlations form between the growth
rates of the capital-labor ratio and labor productivity. In some
instances labor productivity grows faster than the capital-labor
ratio. The result is a rise in the output-capital ratio which pro-
duces a saving of resources for productive accumulation. In other
instances the reverse is true: the capital-labor ratio grows faster
than labor productivity, thereby producing a decline in the output-
capital ratio and causing a demand for additional investments in
production. Thus the situation is such that the effect of increasing
labor productivity in some instances is supplementedby the effect
derived from the higher output-capital ratio-by the saving in
productive accumulations-while in other instances the effect is
partly or even entirely absorbed by expenditures on the compen-
sation of losses resulting from the decline in the output-capital
ratio. In the latter instance it is obviously necessary to know the
upper limit for expenditures on increasing the capital-labor ratio
beyond which the effect of increased labor productivity will no
longer recoup the productive investments associated with the
increase. What is more, the question of maximum expenditures
on increasing the capital-labor ratio arises not only when the
output-capital ratio declines but also when it increases. It arises in
all cases when the expendituresper worker on the annual increase
in the capital-labor ratio ( A@e) exceed the annual effect of the
growth of labor productivity calculated on the basis of national
income ( A @e> A I7 Td ) . In all such cases an increase in labor
productivity within the framework of individual periods of time
has certain limits associated with expenditures on increasing the
capital-labor ratio. There are no such limits only when the corre-
lation between annual increases in the capital-labor ratio and
labor productivity forms in favor of the latter, i.e., when
A @ s < Al7Td.
We approach the task of determining maximum and optimal
growth rates of the capital-labor ratio and labor productivity in
two different ways: (1) we determine the maximum growth rates
24 PROBLEMS OF ECONOMICS

of labor productivity at the given level of spending to increase the

capital-labor ratio; (2) we determine maximum expenditures on
increasing the capital-labor ratio at the labor productivity growth
rate indicated in the plan.
The growth of labor productivity not only requires accumula-
tion of fixed productive capital as a means of increasing such
growth but also requires the accumulation of working capital as a
condition for the functioning of more highly productive labor and
entails the accumulation of commodity stocks as a consequence of
the higher mass of output. Consequently, in the process of deter-
mining the capital-labor ratio and its rise, it is more correct to
take all types of advanced capital named into account. In our
study we determine the capital-labor ratio on the basis of the sum
of fixed productive capital and material working capital per mate-
rial production worker. To be sure, even with the same volume of
advanced capital, this sum may change depending on the worker
shift coefficient. However, in order not to complicate the calcula-
tions, we will not take the influence of this factor into account.
Throughout the national economy as a whole, the sum of ex-
penditures on increasing the capital-labor ratio is part of the
overall productive accumulation fund. The other part of the fund
consists of resources used to create new jobs; we determine the
number of new jobs on the basis of the level of the capital-labor
ratio at the beginning of the year and the increase in the number of
persons employed in the material production sphere in the current
year. The annual increase in total capital per worker can thus be
determined according to the formula

where A @ is the increase in fixed productive capital and material

working capital in the national economy in the current year; Gs,
is total capital per worker at the beginning of the current year;
A T x is the increase in the size of the work force in the material
production sphere in the current year over the preceding year;
 MAY 1984 25

and T q ,is the size of the work force in material production in the
current year.
The ratio of the annual increase in total capital per worker to
the increase in labor productivity for the year calculated on the
basis of national income dl7Td is a unique indicator of the
recoupment of resources invested for the purpose of increasing
the capital-labor ratio. If we assume that the total capital-labor
ratio must be increased by 500 rubles in order to increase the
labor productivity of the average worker by 100 rubles a year, the
recoupment time ( foK ) of these investments due to the effect
resulting from the growth of labor productivity will be 5 years
(500 : loo).
On the other hand, the i!AnTd
?K ratio can be viewed as the “price”
of the growth of social labor productivity ( U ~ Twhich
) , shows
growth of capital per worker required to increase the production
of national income by one ruble. The limits to the growth of labor
productivity are specifically associated with this “price”: other
things being equal, the higher the “price,” the lower the limits.
In any event, no matter how the 6nTd
ratio is viewed-in
terms of recoupment time or the “price” of the growth of labor
productivity-it still does not in itself indicate the maximum
effectiveness of productive investments. We believe that these
quantities cannot be determined for the national economy on the
basis of the national income indicator alone and that it is also
necessary to take the consumption fund into account.*
Indeed, let us assume that U ~ was T 5 rubles, i.e., that every
ruble invested to increase the capital-labor ratio produced a
growth of social labor productivity by 20 kopeks. How accept-
able is such a development variant if, let us assume, 30 kopeks of
national income were produced for every ruble of advanced cap-
ital in the preceding year? A negative answer to this question will
mean the negation of all development variants in which the
growth rate of the capital-labor ratio is relatively more rapid than
the growth rate of labor productivity, in other words, will mean
26 PROBLEMS OF ECONOMICS

the negation of the actual existing capital-intensive type of inten-

sification of production. When we also accept variants with a
declining output-capital ratio, we must indicate the limit beyond
which the variants are not suitable. Obviously, such a limit cannot
equal zero under all conditions.
When we examine the interrelationship between the capital-
labor ratio and labor productivity at the national economic level,
we should proceed from the premise that the ultimate goal of
increasing the capital-labor ratio and labor productivity under
socialism is to increase the consumption fund. This means that
the capital-labor ratio should never be increased by reducing the
consumption fund. When the growth of ppital per worker is
greater than labor productivity ( b @ e > n T d ) , the maximum
growth rate of labor productivity ( AnTd;,, ) can be calculated
according to the formula

where A@6, is the increase in the capital-labor ratio in the base

year vis-kvis the preceding year; n T d , is the productivity of
social labor in the base year determined on the basis of national
income; and UnT, is the “price” of the increase in labor produc-
tivity in the ex post year.
We adduced this formula on the assumption that expenditures
on increasing the capital-labor ratio in the ex post year should not
exceed the sum that forms from the growth of the capital-labor
ratio in the preceding (base) year and the growth of labor produc-
tivity in the ex post year ( A @ e , = A @ e , + A ~ T d o ). In other
words, expenditures to increase the capital-labor ratio should
not exceed the quantity that is equal to the effect obtained in the
given year from the growth of productivity of social labor. Given
this condition, the consumption fund per worker in the ex post
year will not be lower than in the preceding year:
nTd,- (A@e,+ AnTd,) =nTd,-A@e,.
For example, in 1980 total capital per material production
 MAY 1984 27

worker increased by 894 rubles compared with 1979 while the

production of national income increased by 122 rubles. As a
result, the “price” of the growth of labor productivity per ruble
of national income was 7.33 rubles (894 : 122). Since in 1979
nT, was 4,852 rubles and 456, was 796 rubles, the maximum
growth rate of labor productivity in 1980 was 2.6. An increase in
this rate beyond those limits would have meant a lowering of the
consumption fund compared with the level attained in the preced-
ing year. In 1981 the “price” of the growth of labor productivity
per ruble of national income rose to 10.0 rubles while the maxi-
mum increase in labor productivity rose to 2.9 % corresponding-
ly. The actual increase in the productivity of social labor also
proved to be close to this level (3.3%).
An increase in labor productivity such that the entire effect
from the increase would be used for productive accumulation
cannot be considered to agree with the goal of socialist produc-
tion. It is also necessary to consider the fact that the productive
accumulation norm changes within restricted limits under the
normal conditions of development of a socialist economy. In the
USSR this norm was 20.1 % in 1960 and 20.2% in 1975.3This
stituation in our view stems from the circumstance that signifi-
cant changes in the accumulation norm require the substantial
restructuring of the entire social economy, which requires addi-
tional resources and takes a great deal of time. For this reason
there is little promise in an economic development variant in
which the accumulation norm alternately rises and falls and is
accompanied by the corresponding restructuring of the national
economy. Variants in which the accumulation norm constantly
rises or constantly declines are also practically unacceptable. It is
no accident that most researchers conclude that the optimization
of economic growth is a problem that can and should be resolved
with a relatively stable accumulation norm and consequently with
roughly the same growth rates of national income and of the
consumption fund per worker. If we proceed from this premise,
the limits to the potential growth rate of labor productivity associ-
ated with expenditures to increase the capital-labor ratio will be
28 PROBLEMS OF ECONOMICS

Maximum Growth Rates of Social Labor Productlvlty (in %)*

Share in % of per worker national
income expended to increase the
Price of capital-labor ratio
labor productivity (A@,s:nTd)
(in rubles) 10 15 20 25

2 10.015.3 15.018.1 20.0111.1 25.0114.3

3 5.013.4 7.515.3 10.017.1 12,519.1
4 3.312.6 5.013,9 6.715.3 0.316.7
5 2.512.0 3.013.2 5.014.2 6.315.3
*Maximum rates (AL’Td’,) are indicated above the line; rates (AClnZd‘,,,,,)that form when
the increase in labor productivity and expenditures to augment the capital-labor ratio
are uniform ( I U T d - I A U w ) are indicated below the line.

substantially lower than the maximum rate. These limits are

determined according to the formula
Unr,
A I l Ta; = --I, (3)
UnT0- EEL
ma,

where Af7Td; is the limit to the optimal growth rates of labor

productivity at its given “price” ( U ~ T. )
The data in the table show that as the “price” of the growth of
labor productivity increases, its high rates can only be sustained
by increasing the share of national income that is used to increase
the capital-labor ratio. For example, in order to maintain the
annual growth rate of labor productivity at a level of 5.3 % , this
share must be 10%if U ~ isT2 rubles or 25 % of 4 n is~5 rubles.
In the last 20 years the “price” of the growth of the productivity
of social labor in the USSR national economy has fluctuated
mainly between 2 and 5 rubles.
A number of works express the idea that the attainment of
maximum growth rates of labor productivity under socialism “at
any price” is permissible. Thus A. I. Kats maintains that even a
variant of economic development in which labor productivity
increases, let us assume, threefold while the output-capital ratio
 MAY 1984 29

during the same time declines fivefold is advantageous to soci-

. ~ us analyze this variant, in which we assume that the
e t ~ Let
annual volume of national income per production worker in-
creased from 4,000 to 12,000 rubles and capital per worker in-
creased from 10,000 to 150,000 rubles (150 = (10 : 4) 5 * 12)
over a 15-year period, i.e., the “price” of the increase in labor
productivity per ruble of national income was 17.5 rubles. Under
these conditions the average yearly growth rates of labor produc-
tivity will be at the level of 7.6%,while the total national income
per worker over a period of 15 years will be only 113,000 rubles,
i.e., will be significantly lower than the sum (140,000) required
to increase the capital-labor ratio. Such a variant cannot be con-
sidered feasible either for the national economy as a whole or for
individual enterprises and construction projects. The attainment
of maximum labor productivity through excessive increases in the
capital-labor ratio at some enterprises means depriving other
enterprises of the capital investments they need, thereby slowing
the rate of their economic growth. As we see, labor productivity
cannot be increased at any price.
Let us cite a formula that can be used to calculate the maximum
price of the growth of labor productivity ( 4 ~ for ” the
) particu-
lar case in which the index of the growth of labor productivity in
the ex post year vis-i-vis the preceding year ( I l 7 T d ) equals the
index of the increase in the capital-labor ratio, but

A @ e , = A@e6 i- T)
( Al7TAO A@06 . (4)

I “Td*
In such a case U ~ T , =
IflTd-1 *

From formula (4) it is evident that ceteris paribus the higher

the rate of increase of labor productivity, the lower the “price” of
its growth must be. Let *=0,2, and let us assume that
30 PROBLEMS OF ECONOMICS

national income and the consumption fund are planned to in-

crease by 5 % per worker. Under the conditions we have adopted,
the “price” of the growth of labor productivity must not exceed
4.2 rubles. But if output is slated to be increased not by 5% but by
8%,the “price” must accordingly be lowered from 4.2 to 2.7
rubles. Otherwise (i.e., when U ~ T 2.7 > rubles), the increase in
labor productivity to the targeted level will be the result of the
lowering of the share of the consumption fund in national income.
Thus the higher the growth of labor productivity with the given
volume of productive investments, the lower the “price” of this
growth. A high price of labor productivity growth coupled with a
simultaneouslyaccelerating rate of such growth can only be sus-
tained by increasing the accumulation norm.
Given the manpower shortage, it is specifically in the cause-
and-effect relationship between the capital-labor ratio and labor
productivity that the direct dependence of the rate of expanded
reproduction of the social product on the level and dynamics of its
capital intensiveness is seen most graphically. Its lowering saves
labor as a result of the saving in productive accumulation and
expands the framework for increasing economic growth rates.
The raising of the capital-output ratio absorbs a considerable part
of the national income that is additionally attained from the effec-
tiveness of productions and is fraught with the threat that eco-
nomic growth rates will decline.
Thus, with the given growth rates of labor productivity, it is
necessary to ascertain maximum expenditures to increase the
capital-labor ratio; for the given investments in increasing the
capital-labor ratio, it is necessary to ascertain the maximum
growth rates of labor productivity. These demands express the
objective interconnection between the capital-labor ratio and la-
bor productivity: if the growth of the capital-labor ratio is a
condition for higher labor productivity, the latter in turn is an
additional source of resources for increasing the capital-labor
ratio. The “price” of the growth of labor productivity, which is
first of all determined by the degree to which achievements in the
scientific and technological revolution are utilized, is most im-
 MAY 1984 31

portant here. The Report of the Central Committee of the CPSU

to the Thenty-sixth Party Congress states: “The introduction of
scientific discoveries and inventions today is a decisive, extreme-
ly important sector.”5
Analysis of the possible variants of the correlation of the
growth rates of the capital-labor ratio and labor productivity in
the face of different types of intensification of production6leads
us to the following conclusions,
1. The general principle of the effectiveness of using re-
sources to increase the capital-labor ratio can be formulated as the
maximum increase in the production of the consumption fund per
worker with a given volume of investment to increase the total
capital-labor ratio.
2. Given the neutral type of intensification of production,
equal growth rates of national income and of the consumption
fund per productive worker ( I n T d =I I T A , ) are possible only if
the growth rates of labor productivity are equal in the ex post and
base years. If the rates are higher in the ex post year, then
I 1 7 T d > I n T A n ; if they are higher in the preceding year, then
I n T d < IUTA,.
3. Given the capital-intensivetype of intensification of pro-
duction, the equality I17Td=I17TAn is possible only if the
growth rates of labor productivity are lowered.
4. Only the capital-saving type of intensification of produc-
tion can produce equal and even relatively more rapid growth
rates of the consumption fund compared with the growth rates of
national income given stable or even rising growth rates of the
productivity of social labor.
5 . Maximum growth rates of labor productivity and of the
capital-labor ratio cannot be determined unless the size of the
consumption fund is taken into account.

Notes
1 . See V. Perevedentsev, “Narodonaselenie i demograficheskaia politika
partii,” Politicheskoe samoobrazownie, 1981, no. 8 , p. 45.
2. The reference here is not only to the current consumption fund that is a
32 PROBLEMS OF ECONOMICS

statistical category but also to-the nonproductive accumulation fund. In this

case the “consumption fund’’ is understood to mean the excess of national
income over productive accumulation.
3. This norm is determined on the basis of the share of the sum of the
increase of fixed capital, material working capital, and reserves in utilized
national income.
4. See A. I. Kats, Ekonomicheskii dinumicheskii optimum, Moscow, 1970,
pp. 150-51.
5 . Materialy XXVI s”e& KPSS, Moscow, 1981, p. 43.
6. Here we accept the position of A. Notkin, who differentiates three types
of intensification of production: neutral, capital-intensive, and capital-saving.