Productivity

View FREE Lessons!

Definition of Productivity:

Productivity is a measure of efficiency. It is the output achieved per unit of input over a defined period of time.

Detailed Explanation:

Productivity can be expressed in terms of physical units produced (physical productivity) or as revenue (economic productivity). For example, assume Chris owns a landscaping business. He is considering investing in a new lawnmower because it would enable him to increase the number of lawns he can cut from three to five per day. Chris’s physical productivity would increase from three to five lawns per day. However, Chris is concerned the cost of the lawnmower may not justify the investment. He needs to measure the improvement in his economic productivity. Chris’s average fee is $40 per yard. Presently his economic productivity is $120 per day (3 yards x $40 per yard). With the new lawnmower, his economic productivity increases to $200 per day (5 yards x $40 per yard). The new lawnmower costs $5,000. Chris decides the improvement in productivity is worth the investment because it would only take him 63 days to pay for the new lawnmower. 

Long-term economic growth and improvements in a country’s standard of living depend on increasing productivity. Economic growth can be achieved by employing more people, but real wages would remain stagnant without an improvement in productivity. A company or country can increase its productivity by investing in more physical capital, educating its present and future workers, and by developing new technologies. 

The example above illustrates how physical capital, a lawnmower, improved Chris’s productivity. The same is true of most businesses...using machines and equipment will improve productivity, even if the acquired machines are not the latest technology. Most equipment requires some level of training to operate. An educated workforce increases productivity. Not only are they trained to operate more sophisticated equipment, but an educated worker is probably better equipped to manage other workers and develop innovative ideas. Finally, technological innovations raise efficiency and productivity. Automated manufacturing plants have reduced the number of required employees.  Accounting software has made paying bills and maintaining financial records easier, thereby reducing the need for bookkeepers. Businesses invest to improve productivity which reduces costs and results in higher profits. Eventually, the cost savings can be shared with investors as dividends, employees as higher wages, and consumers as lower prices. 

Many companies have outsourced manufacturing to countries with less expensive labor, even though the foreign labor may not be as productive as the domestic labor. The lower costs warranted outsourcing. However recently, increases in foreign labor costs combined with improvements in technology have increased economic productivity enough for several companies to resume production domestically. 

Governments can provide an environment conducive to advancing productivity. Policies that encourage investment in capital, innovation, and entrepreneurship provide incentives for businesses to improve their efficiency. Government investments in education and improvements in the infrastructure increase a nation’s productivity.

Economists closely monitor an economy’s productivity. For the economy, productivity equals GDP / Total hours worked. The Bureau of Labor Statistics is responsible for providing these statistics in the United States. 

Bureau of Labor Statistics

Many feel threatened by technology and fear the loss of jobs. When improvements in productivity are not matched by growth in GDP, unemployment does increase. This occurs during a recession or near the peak of a business cycle. However, it is more common for the increase in GDP to exceed the increase in productivity. More workers need to be employed during these periods of economic growth.

Dig Deeper With These Free Lessons:

Capital and Consumer Goods – How They Influence Productivity
Changes in Supply – When Producer Costs Change
Factors of Production – The Required Inputs of Every Business
Fiscal Policy – Managing an Economy By Taxing and Spending
Production Possibilities Frontier