Earl V. MeisterWhat is productivity?
In economics, productivity measures output per unit of input such as labor, capital, or other resources – and is typically calculated for the economy as a whole as the ratio of gross domestic product (GDP) to hours worked. Labor productivity can 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 firm level, where productivity is a measure of the efficiency of a firm’s production process, it is calculated by measuring the number of units produced relative to employee hours or a firm’s net sales relative to employee hours.
Understanding productivity
Productivity is the most important source of economic growth and competitiveness. A country’s ability to improve its standard of living depends almost entirely on its ability to increase its output per worker, that is, to produce more goods and services for a given number of hours worked. Economists use productivity growth to model the productive capacity of economies and determine their capacity utilization rates. This, in turn, is used to predict business cycles and forecast future GDP growth. In addition, production capacity and capacity 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 is based on increases in capital available to each worker (capital deepening), education and experience of the labor force (labor composition), and improvements in technology (multi-factor productivity growth).
Productivity, however, is not necessarily an indicator of the health of an economy at any given time. For example, during the 2009 recession in the United States, both output and hours worked declined while productivity grew-because hours worked fell faster than output. Because productivity increases can occur in recessions as well as expansions-as they did in the late 1990s-it is important to consider the economic context when analyzing productivity data.
The solo plant
There are many factors that influence a country’s productivity, including investment in plant and equipment, innovation, improvements in supply chain logistics, education, enterprise, and competition. The solo value, commonly referred to as total factor productivity, measures the portion of an economy’s output growth that is not due 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 referred to as multi-factor productivity (MFP), this measure of economic performance compares the number of goods and services produced with 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
If productivity does not grow significantly, it limits potential wage -, business profits, and living standards. Investment in an economy is equal to the level of savings, since investment must be financed from savings. Low savings rates can lead to lower investment rates and lower growth rates for labor productivity and real wages. For this reason, there is concern that the low savings rate in the U.S. may hurt productivity growth in the future.
Since the global financial crisis, labor productivity growth has collapsed in every advanced economy. This is one of the main reasons why GDP growth has been so sluggish since then. In the U.S., labor productivity growth fell to an annualized rate of 1.1% between 2007 and 2017, compared to an average of 2.5% in nearly every economic recovery since 1948, and this has been attributed to the declining quality of labor, diminishing returns from technological innovation, and the global debt overhang, which has led to increased taxation, which in turn has suppressed demand and investment.
A big question is what role quantitative easing and zero interest rate policy (ZIRP) have played in encouraging consumption at the expense of savings and investment. Companies have spent money on short-term investments and stock buybacks instead of investing in long-term capital. One solution, in addition to better education, training and research, is to encourage investment. And the best way to do that, economists say, is to reform corporate taxation, which should increase investment in manufacturing.
Earl V. Meister
