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# PRODUCTIVITY GROWTH HYPTHESIS Essay

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BusinessPRODUCTIVITY GROWTH HYPTHESISIn this assignment, we will attempt to study the effects that differencein Income Ratio (henceforth known as I. R. ) between the years 1980 and 1990have on the Productivity Growth (P. G. ) during the same period of time.

The Income Ratio of one specific year can be found if we take the averageincome of the richest faction of a country (the richest 20% of thepopulation) and divide it by that of the poorest faction (the poorest 20%). In this assignment, the Income Ratios that were used were those of 13different countries. The I. R. ‘s on both 1980 and 1990 were taken for allthese countries and, to find the difference between them, the I. R.

for 1990was divided by the I. R. for 1980, for each country. These new numbersillustrate the change of I.

R. between the two years so that we can comparehow the P. G. changes in relation to the changes in the I. R. .

On this assignment, we use inductive reasoning to examine the data andfind a theory (a hypothesis) that would combine the data given in a waythat would make sense, based solely on our data. How do we know if the”theory” that we formulate makes sense? In this case we will plot thepoints (derived from the column “I. R. 1990/1980,” going on the x-axis, andthe column “Productivity Growth 79-90,” on the y-axis).

According to howthe points are on the graph in relation to the Average Point (0. 94,1. 45)(point that is an average of all values and which divides the graph intofour Quadrants), if 80% of these points are where they would be expected tobe to conform to the hypothesis, then there is no reason to reject thishypothesis. If, on the other hand, the majority of the points does notconform to our hypothesis (are not where they were predicted to be), thenit is rejected. Another method of reasoning frequently used by Mainstream economists is”deductive knowledge,” as opposed to “inductive,” described above. Theirtheory is formulated and only then it is applied to the data.

Their theoryon this subject suggests that productivity within a country grows when thepopulation has incentives to work harder (or to work more). When the gapbetween rich and poor increases (an increase in I. R. form 1980-90,resulting in a larger ratio on the column I.

R. 1990/1980), so does thepopulation’s eagerness to work, therefore increasing the ProductivityGrowth. Since when one variable goes up the other also goes up, there is apositive (or direct) correlation between the two. Mainstream economists usedeductive reasoning to deduce that there exists a positive correlationbetween the two factors. In short, their hypothesis is that when the IncomeRatio increases, the Productivity Growth also increases, since people aremore motivated. For this to be true, we would expect a line going up and tothe right on the graph, passing by Quadrants II and IV.

Most points (80% ormore) would have to be on these two Quadrants. This, however, is not thecase (see graph), since only about 30. 77% of the points plotted satisfythese conditions. Since the original hypothesis was rejected, we might want to see if thereis a negative correlation between the two variables (that is, as one goesup, the other goes down). Our new hypothesis would then be “as the IncomeRatio increases, the Productivity Growth decreases.

” Then, in the case of ahigh I. R. , people in lower classes would rationally start to feel insecureand that their work is not being recognized by society, therefore losingmotivation and producing less. In this case, since there’s a negativecorrelation, one would expect the line on the graph to go downwards, fromleft to right, passing on Quadrants I and III. If this hypothesis werevalid, 80%+ of the points would have to be on these Quadrants. This is alsonot the case, for only 69.

32% of the points are on the appropriateQuadrants. Like the first, this second hypothesis also has to be rejected. After analyzing these two relationships and seeing that neither is valid,we conclude that there is no direct relationship between the two variablestested. That does not mean that one has no effect on the other (it probablydoes), only that there may be other factors and influences involved thathave not been accounted for in this assignment and that one is not the onlyfactor responsible for the changes in the other. DATA SHEETCountryIncome Ratio1980ProductivityGrowth1979-90Income Ratio1990Income Ratio1990 / 1980 United States9.

00. 411. 01. 2Australia 9. 60.

89. 61. 0New Zealand8. 81. 48. 81.

0Switzerland8. 71. 08. 00.

91Canada 7. 01. 17. 01. 0Britain 6.

82. 07. 01. 03France 6. 52.

46. 00. 92Italy6. 12.

05. 80. 95Germany 5. 81. 65. 00.

87Holland 5. 61. 55. 00.

89Belgium 4. 72. 23. 80.

81Sweden 4. 71. 53. 80. 81Japan4.

21. 03. 60. 85Average Income Ratio 1990 / 1980: 0.

941Average Productivity Growth 1979-90: 1. 45No. of points conforming to first hypothesis: 4/13 = 30. 77%No. of points conforming to second hypothesis: 9/13 = 69.23%By: Leonardo Santos

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