There are three main reasons why the average U.S. worker today produces far more than his or her counterpart a century ago. First, the modern worker has far more physical capital, such as machinery and office space, to work with. Second, the modern worker is much better educated and so possesses much more human capital. Finally, modern firms have the advantage of a century’s accumulation of technical advancements reflecting a great deal of technological progress.

Let’s look at each of these factors in turn.

Increase in Physical Capital Economists define physical capital as manufactured resources such as buildings and machines. Physical capital makes workers more productive. For example, a worker operating a backhoe can dig a lot more feet of trench per day than one equipped only with a shovel.

The average U.S. private-sector worker today is backed up by more than $150,000 worth of physical capital—far more than a U.S. worker had 100 years ago and far more than the average worker in most other countries has today.

Increase in Human Capital It’s not enough for a worker to have good equipment—he or she must also know what to do with it. Human capital refers to the improvement in labor created by the education and knowledge embodied in the workforce.

The human capital of the United States has increased dramatically over the past century. A century ago, although most Americans were able to read and write, very few had an extensive education. In 1910, only 13.5% of Americans over 25 had graduated from high school and only 3% had four-year college degrees. By 2010, the percentages were 87% and 30%, respectively. It would be impossible to run today’s economy with a population as poorly educated as that of a century ago.

Analyses based on growth accounting, described later in this chapter, suggest that education—and its effect on productivity—is an even more important determinant of growth than increases in physical capital.

Technological Progress Probably the most important driver of productivity growth is technological progress, which is broadly defined as an advance in the technical means of the production of goods and services. We’ll see shortly how economists measure the impact of technology on growth.

Workers today are able to produce more than those in the past, even with the same amount of physical and human capital, because technology has advanced over time. It’s important to realize that economically important technological progress need not be flashy or rely on cutting-edge science. Historians have noted that past economic growth has been driven not only by major inventions, such as the railroad or the semiconductor chip, but also by thousands of modest innovations, such as the flat-bottomed paper bag, patented in 1870, which made packing groceries and many other goods much easier, and the Post-it® note, introduced in 1981, which has had surprisingly large benefits for office productivity. Experts attribute much of the productivity surge that took place in the United States late in the twentieth century to new technology adopted by service-producing companies like Walmart rather than to high-technology companies.