DEFINITION of ‘One-Third Rule’
A rule of thumb that estimates the change in labour productivity based on changes in capital per hour of labor. Specifically, the one-third rule states that on average an increase of 1% in capital per hour of labour will result in approximately a 0.33% increase in labor productivity. This rule assumes no changes in technology or human capital.
BREAKING DOWN ‘One-Third Rule’
Increases in labour productivity represent increases in real GDP per person, and thus labor productivity can usually be used as a guide to the level of standard of living. Growing labour productivity relies on three main factors: investment and savings in physical capital, technology and human capital. The rule only looks at one factor while holding the other two factors constant. This correlation was first observed by Robert Solow while studying economic growth in the U.S.