What is... | July 28, 2015

What is productivity?

An argument we’ve heard often at work and from politicians is that we all need to “do more with less”. This is about becoming more productive – but what does the term “productivity” really mean?

Politicians and economists talk about productivity a lot because they use the measure to forecast economic growth and gross domestic product (GDP). Productivity is often expressed as a ratio of GDP to total hours worked in a specific period of time – although there are different ways to measure it.

Increasing productivity can raise living standards, because it can help companies grow and distribute wealth. If people earn more money, they may spend more of it on goods and services – boosting economies nationally or even worldwide.

What goes in must come out
Productivity as a way to measure efficiency can refer to an individual person, a machine, a factory, a company, a system, or a whole country. It’s about what’s produced in relation to costs, such as labour, money and other resources.

Productivity can be calculated by dividing the average output per time period by the total costs incurred or resources consumed in that same time period. This can include a range of inputs, as in total factor productivity (TFP) or multi factor productivity (MFP). You can also calculate partial productivity – perhaps by just working out labour productivity and calculating the output per hour.

Creating and competing
Economists believe productivity can be boosted by increasing investment, innovation, skills, competition and encouraging people to become more enterprising. For example, certain innovations, such as computers and other electronic gadgets, can help people do more in less time. A 2013 research paper suggests factors such as motivation and morale can also affect productivity.

March of progress
OECD figures suggest most of the G7 countries saw productivity decline from 2000 to 2015. After the global financial crash of 2008, this low-productivity situation became part of what the International Monetary Fund called a New Normal.

Many developed economies have focused on services, where it is harder to raise productivity than in production-oriented sectors like manufacturing or farming.

Reaching for new heights
Some commentators have said low productivity is not necessarily a bad thing. However, boosting productivity is a key way to increase economic growth. It can also improve the returns on investments of all kinds, including shares.

Higher productivity can benefit individuals, organisations, and countries. Better living standards are possible as well as increased trade and investment, both at home and overseas.


eZonomics team
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