Productivity, in economics, measures output per unit of input, such as labor, capital or any other resource – and is typically calculated for the economy as a whole, 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, where 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.
Steve Pavlina defines productivity as:
Productivity = Value / Time (productivity equals value divided by time)
By this definition there are two primary ways of increasing productivity:
1) Increase the value created
2) Decrease the time required to create that value
Pavlina goes on to talk about how we can understand and measure value:
Value is a quality you must define for yourself. Hence, any definition of productivity is relative to the definition of value. Pavlina defines value as a product:
Value = Impact x Endurance x Essence x Volume
Productivity = Impact x Endurance x Essence x Volume / Time
Impact refers to how many people are influenced by your work, or to what degree they are influenced. Endurance refers to how long your work will last (think of the longevity of a sandwich vs. a digital graphic design vs. a classic work of art). Essence refers to the quality and type of what you do; is it easily mimicked, or unique? Is its effect deep and important, or temporary and self-limiting? Volume refers to the quantity of what you produce as defined by your particular work.
In the most immediate sense, productivity is determined by the available technology or know-how for converting resources into outputs, and the way in which resources are organized to produce goods and services. Historically, productivity has improved through evolution as processes with poor productivity performance are abandoned and newer forms are exploited. Process improvements may include organizational structures (e.g. core functions and supplier relationships), management systems, work arrangements, manufacturing techniques, and changing market structure. A famous example is the assembly line and the process of mass production that appeared in the decade following commercial introduction of the automobile.
Mass production dramatically reduced the labor in producing parts for and assembling the automobile, but after its widespread adoption productivity gains in automobile production were much lower. A similar pattern was observed with electrification, which saw the highest productivity gains in the early decades after introduction. Many other industries show similar patterns. The pattern was again followed by the computer, information and communications industries in the late 1990s when much of the national productivity gains occurred in these industries.
There is a general understanding of the main determinants or drivers of productivity growth. Certain factors are critical for determining productivity growth. The Office for National Statistics (UK) identifies five drivers that interact to underlie long-term productivity performance: investment, innovation, skills, enterprise and competition.
- Investment is in physical capital — machinery, equipment and buildings. The more capital workers have at their disposal, generally the better they are able to do their jobs, producing more and better quality output.
- Innovation is the successful exploitation of new ideas. New ideas can take the form of new technologies, new products or new corporate structures and ways of working. Speeding up the diffusion of innovations can boost productivity.
- Skills are defined as the quantity and quality of labor of different types available in an economy. Skills complement physical capital, and are needed to take advantage of investment in new technologies and organizational structures.
- Enterprise is defined as the seizing of new business opportunities by both start-ups and existing firms. New enterprises compete with existing firms by new ideas and technologies increasing competition. Entrepreneurs are able to combine factors of production and new technologies forcing existing firms to adapt or exit the market.
- Competition improves productivity by creating incentives to innovate and ensures that resources are allocated to the most efficient firms. It also forces existing firms to organize work more effectively through imitations of organizational structures and technology.
Productivity's Effect on Job Growth and Income
Productivity and Job Growth
Higher productivity no longer leads to more jobs, as it did until 2000.4 Job growth has been stagnant; however, the Bureau of Labor Statistics projects that employment will grow through 2029 by 6 million jobs, which reflects an annual rate of growth of 0.4%.5 While any amount of job growth is good, the stagnant trend in growth stems from a transition of jobs to new industries. Newer jobs are expected to focus on areas that will require secondary education, technical training, and technical skills.
The International Federation of Robotics estimates there are between 1.5 and 1.75 million industrial robots in operation. By 2025, it predicts as many as 6 million. Most are in the auto and electronics industries.6 Researchers from M.I.T. estimated that every robot costs 3.3 jobs.7
Increased automation in factories and service industries is one of the culprits for the shift. Also, automation is replacing many jobs that used to require a person, such as secretaries, bank tellers, or bookkeepers. The fastest-growing jobs are now in sectors that require innovation, insights, and reasoning—traits that artificial intelligence and automation are not yet able to mimic. Expectations for the highest amount of job growth are in energy, health, and information security.
Outsourcing leads to a lower U.S. standard of living as wages equalize. In addition, the U.S. labor force has become less competitive, adding to pressures to accept lower wages.
U.S. companies are being forced to offer lower wages to U.S. employees if they are to compete against companies in countries with lower living standards. If U.S. companies can't find enough low-wage, skilled workers in the United States, they have to source these jobs overseas or go out of business.
Productivity and Income
This discrepancy in productivity has slowed the rising standard of living for most Americans. Companies not in the top 5% can't afford to pay their workers more. Salaries at tech behemoths like Google, Amazon, and Facebook have outpaced average wages.
The 2008 financial crisis aggravated this trend. While GDP has continued to increase, it didn't translate to an equal increase in workers' standard of living. Instead, it went to the owners of capital—shareholders and executives. Corporate profits reached an all-time high in 2012—11.8% of GDP, up from 5% in 2000.