Productivity

What Is Productivity?

Productivity, in economics, measures output per unit of input, such as labor, capital, or any other resource. It is often calculated for the economy as a ratio of gross domestic product (GDP) to hours worked.

Labor productivity may be further broken down by sector to examine trends in labor growth, wage levels, and technological improvement. Corporate profits and shareholder returns are directly linked to productivity growth.

At the corporate level, productivity is a measure of the efficiency of a company's production process, it is calculated by measuring the number of units produced relative to employee labor hours or by measuring a company's net sales relative to employee labor hours.

Understanding Productivity

Productivity is the key source of economic growth and competitiveness.

A country’s ability to improve its standard of living depends almost entirely on its ability to raise its output per worker (i.e., producing more goods and services for a given number of hours of work). Economists use productivity growth to model the productive capacity of economies and determine their capacity utilization rates. This, in turn, is used to forecast business cycles and predict future levels of GDP growth.

In addition, production capacity and utilization are used to assess demand and inflationary pressures.

Labor Productivity

The most commonly reported productivity measure is labor productivity published by the Bureau of Labor Statistics. This is based on the ratio of GDP to total hours worked in the economy. Labor productivity growth comes from increases in the amount of capital available to each worker (capital deepening), the education and experience of the workforce (labor composition), and improvements in technology (multi-factor productivity growth).

However, productivity is not necessarily an indicator of the health of an economy at a given point in time. For example, in the 2009 recession in the United States, output and hours worked were both falling while productivity was growing (hours worked was falling faster than output).

Gains in productivity can occur both in recessions and in expansions — as it did in the late 1990s — so one needs to take economic context into account when analyzing productivity data.

The Solow Residual

There are many factors that impact a country’s productivity. Such things include investment in plant and equipment, innovation, improvements in supply chain logistics, education, enterprise, and competition.

The Solow residual, which is usually referred to as total factor productivity, measures the portion of an economy’s output growth that cannot be attributed to the accumulation of capital and labor.

It is interpreted as the contribution to economic growth made by managerial, technological, strategic, and financial innovations.

Also known as multi-factor productivity (MFP), this measure of economic performance compares the number of goods and services produced to the number of combined inputs used to produce those goods and services. Inputs can include labor, capital, energy, materials, and purchased services.

Productivity and Investment

When productivity fails to grow significantly, it limits potential gains in wages, corporate profits, and living standards.

Investment in an economy is equal to the level of savings because investment has to be financed from savings. Low savings rates can lead to lower investment rates and lower growth rates for labor productivity and real wages. This is why it is feared that the low savings rate in the U.S. could hurt productivity growth in the future.

Since the global financial crisis, growth in labor productivity has been weak.

In the U.S., labor productivity growth grew by 1.1% annualized between 2007 and 2017, compared to an average of 2.5% in nearly every economic recovery since 1948. This has been blamed on the declining quality of labor, diminishing returns from technological innovation, and the global debt overhang, which has led to increased taxation. That, in turn, has led to suppressed demand and capital expenditure. In 2020, global growth productivity fell about 0.9%.

A big question is what role quantitative easing and zero interest rate policies (ZIRP) have played in encouraging consumption at the expense of saving and investment.

Companies have been spending money on short-term investments and share buybacks, rather than investing in long-term capital. One solution, besides better education, training, and research, is to promote capital investment. And the best way to do that, economists say, is to reform corporate taxation, which should increase investment in manufacturing.

More recently, there have been some signs that the 2020 economic crisis and lockdown have actually boosted productivity growth. Why?

Since companies from just about every single industry — from restaurants and factories to financial institutions and retail stores — are leaning on technology more than ever, workers are being allowed to focus on "higher-value" tasks. The work-from-home model, for instance, is becoming a permanent setup for businesses around the world.

Important

Productivity is largely determined by the technologies available and management's willingness and know-how to make process improvements.

How to Calculative Productivity

The calculation for productivity is straightforward: divide the outputs by a company by the inputs used to produce that output. The most regularly used input is labor hours, while the output can be measured in units produced or sales.

For instance, if a factory produced 10,000 widgets last month while being billed for 5,000 hours worth of labor, productivity would simply be two widgets per hour (10,000 / 5,000).

Sales can also be used as a measure of output. For that factory, let's say 10,000 widgets translates into $1 million dollars in sales. We simply need to divide the $1 million figure by 5,000 labor hours in order to get our productivity number: $20 in sales for each hour of labor.

Examples of Productivity

Auto manufacturing giant Toyota offers a prime example of high-end productivity in real life. The company has very humble beginnings but has grown to become one of the largest and most productive car manufacturers in the world. Its "Toyota Production System" (TPS) is one of the main reasons for that.

TPS includes a few of the following principles:

In 2010, Toyota had to recall roughly 9 million cars due to pedal entrapment and accelerator issues. Straying away from its foundational TPS principles were widely blamed for the recalls.

Since then, management has refocused on its foundational TPS philosophy.

Of course, a real-world look at productivity wouldn't be complete without talking about Amazon, the world's largest online marketplace.

Amazon's fulfillment centers are at the heart of its operation. Employees must work at machine-like efficiency levels in order to track, pack, and sort thousands of orders each day.

However, very few realize just how much Amazon pushes the envelope of productivity.

According to a 2019 article by The Verge, Amazon fired "hundreds" of employees at a single facility between August 2017 and September 2018 for failing to meet productivity goals.

Productivity FAQs

What does productivity mean?

Productivity is the level of efficiency in the production process. It's usually expressed as the ratio between aggregate output and aggregate input in the production process.

What is productivity in the workplace?

Productivity in the workplace refers simply to how much "work" is done over a specific period of time. Depending on the nature of the company, the output can be measured by things like customers acquired, phone calls made, and, of course, sales gained.

How can you improve personal productivity?

Some commonsense ways to increase personal productivity on a daily basis include:

The Bottom Line

The concept of productivity is simple: the level of output per unit of input. However, its importance can't be stressed enough.

Whether we're coming at it from an economic standpoint, company standpoint, or personal standpoint, being able to measure and track productivity can be crucial to long-term success.