Productivity
What is Productivity?
Productivity is the amount of output produced per unit of input, most often output per worker or per hour worked.
Rising productivity is the main long-run source of economic growth and higher living standards. It increases from better technology, more capital per worker, and improved human capital. Higher productivity shifts long-run aggregate supply to the right.
Productivity: a worked example
Suppose a bakery staffs 6 workers for 8 hours, giving 6 × 8 = 48 labor hours, and turns out 720 loaves. Labor productivity is 720 ÷ 48 = 15 loaves per hour. The owner then installs faster ovens. With the same 6 workers over the same 8 hours, output climbs to 864 loaves, so productivity becomes 864 ÷ 48 = 18 loaves per hour, a rise of (18 - 15) ÷ 15 × 100 = 20%. Now check unit labor cost. At a wage of $18 per hour, labor cost per loaf falls from $18 ÷ 15 = $1.20 to $18 ÷ 18 = $1.00. The bakery pays the identical wage while cutting cost per loaf by 20 cents.
The mistake students make with productivity
Reporting a rise in total output as a rise in productivity is the standard slip. The pull is obvious, since both sound like the firm is doing better, but productivity is a ratio and output is only its numerator. If a plant lifts output 25% by adding a second shift that lifts labor hours 25%, output per hour has not budged. Divide before concluding anything. The trap also runs in reverse: output can fall while productivity rises, whenever hours are cut more sharply than production is.
Productivity questions
How do you calculate labor productivity?
Labor productivity divides total output by the labor input used to make it, most often total hours worked. A crew producing 960 units in 240 hours has productivity of 960 ÷ 240 = 4 units per hour. Output per worker is the same idea with workers in the denominator, which is less precise whenever hours per worker change. Keep the output measure in physical units or in real dollars so that inflation does not quietly inflate the ratio.
What causes labor productivity to rise?
Three forces lift output per hour: more physical capital for each worker, more human capital in the workforce, and better technology or work organization. A crew handed a second forklift moves more pallets per hour, and that same crew trained on a faster loading sequence moves more still. Productivity can also climb for a bleaker reason, when a firm closes its least efficient operations, so a jump in the ratio always deserves a check on whether the numerator or the denominator did the moving.
Why does higher productivity lead to higher wages?
Firms hire labor up to the point where the extra output a worker generates is worth the wage paid. When productivity rises, each hour of work brings in more revenue, so competing employers can bid wages up without losing money. Over long stretches, real wage growth in an economy tends to track growth in output per hour. The link is loose in any single year, because bargaining power, benefit costs, and movements in the price level all interfere.
Formula / Example
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Related terms
Common comparisons
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