Factors Affecting Labor Productivity: An Empirical Evidence from Pakistan

Abstract

Labor productivity is important as it is the major factor determining nations' living standards. This study analyzes the factors affecting labor productivity in Pakistan using time series data. ARDL model is applied for estimation of the long run relationship of variables for the period 1981-2018. Data have been taken from the Handbook of Statistics of State Bank of Pakistan and various economic surveys of Pakistan. The findings show that wages, human capital investment, labor force participation, and inflation significantly affect labor productivity. The results indicate that wage rate has a positive effect on labor productivity, and human capital investment also is positively related to labor productivity. At the same time, labor force participation and inflation are negatively related to labor productivity. These findings imply that labor productivity can be raised by increasing the wage rate and investing more in human capital. Results are consistent with efficiency wage theory and human capital theory.