One-Third Rule

The amount of a birthday cake you can eat by yourself in a darkened room without officially declaring yourself as a lonely loser.

The economic version of the rule has to do with labor productivity. Productivity measures how efficiently people use labor to produce goods and services. Your company used to require 5 man hours to manufacture a single ball gag. Now it takes 4 man hours. That equates to a 20% increase in productivity.

The one-third rule provides a guideline for estimating the amount of productivity that comes about through changes in capital per hour labor. Basically, it allows economists to ballpark how increases in physical capital will boost worker productivity. The rule states that productivity will rise about one-third of the rise in capital per hour of labor (hence the rule's name). So increase the capital figure by 3%, and productivity will rise about 1%.

With this rule of thumb at their disposal, economists can also estimate how much of a change in productivity is related to other factors, such as technology upgrades. Say productivity rises 2.5% and capital per hour labor climbs 1.5%. The one-third rule states that the capital part of that equation contributed 0.5% of the increase in the productivity. Therefore, technology contributed a 2% boost to productivity.