Productivity

Productivity describes various measures of the efficiency of production. Often (yet not always), a productivity measure is expressed as the ratio of an aggregate output to a single input or an aggregate input used in a production process, i.e. output per unit of input. Most common example is the (aggregate) labour productivity measure, e.g., such as GDP per worker. There are many different definitions of productivity (including those that are not defined as ratios of output to input) and the choice among them depends on the purpose of the productivity measurement and/or data availability. The key source of difference between various productivity measures is also usually related (directly or indirectly) to how the outputs and the inputs are aggregated into scalars to obtain such a ratio-type measure of productivity. Productivity describes various measures of the efficiency of production. Often (yet not always), a productivity measure is expressed as the ratio of an aggregate output to a single input or an aggregate input used in a production process, i.e. output per unit of input. Most common example is the (aggregate) labour productivity measure, e.g., such as GDP per worker. There are many different definitions of productivity (including those that are not defined as ratios of output to input) and the choice among them depends on the purpose of the productivity measurement and/or data availability. The key source of difference between various productivity measures is also usually related (directly or indirectly) to how the outputs and the inputs are aggregated into scalars to obtain such a ratio-type measure of productivity. Productivity is a crucial factor in production performance of firms and nations. Increasing national productivity can raise living standards because more real income improves people's ability to purchase goods and services, enjoy leisure, improve housing and education and contribute to social and environmental programs. Productivity growth can also help businesses to be more profitable. Productivity measures that use one class of inputs or factors, but not multiple factors, are called partial productivities. In practice, measurement in production means measures of partial productivity. Interpreted correctly, these components are indicative of productivity development, and approximate the efficiency with which inputs are used in an economy to produce goods and services. However, productivity is only measured partially – or approximately. In a way, the measurements are defective because they do not measure everything, but it is possible to interpret correctly the results of partial productivity and to benefit from them in practical situations. At the company level, typical partial productivity measures are such things as worker hours, materials or energy used per unit of production. Before widespread use of computer networks, partial productivity was tracked in tabular form and with hand-drawn graphs. Tabulating machines for data processing began being widely used in the 1920s and 1930s and remained in use until mainframe computers became widespread in the late 1960s through the 1970s. By the late 1970s inexpensive computers allowed industrial operations to perform process control and track productivity. Today data collection is largely computerized and almost any variable can be viewed graphically in real time or retrieved for selected time periods. In macroeconomics, a common partial productivity measure is labour productivity. Labour productivity is a revealing indicator of several economic indicators as it offers a dynamic measure of economic growth, competitiveness, and living standards within an economy. It is the measure of labour productivity (and all that this measure takes into account) which helps explain the principal economic foundations that are necessary for both economic growth and social development. In general labour productivity is equal to the ratio between a measure of output volume (gross domestic product or gross value added) and a measure of input use (the total number of hours worked or total employment). The output measure is typically net output, more specifically the value added by the process under consideration, i.e. the value of outputs minus the value of intermediate inputs. This is done in order to avoid double-counting when an output of one firm is used as an input by another in the same measurement. In macroeconomics the most well-known and used measure of value-added is the Gross Domestic Product or GDP. Increases in it are widely used as a measure of the economic growth of nations and industries. GDP is the income available for paying capital costs, labor compensation, taxes and profits.(OECD 2008,11) Some economists instead use gross value added (GVA); there is normally a strong correlation between GDP and GVA. (Freeman 2008,5) The measure of input use reflects the time, effort and skills of the workforce. Denominator of the ratio of labour productivity, the input measure is the most important factor that influences the measure of labour productivity. Labour input is measured either by the total number of hours worked of all persons employed or total employment (head count). (Freeman 2008,5) There are both advantages and disadvantages associated with the different input measures that are used in the calculation of labour productivity. It is generally accepted that the total number of hours worked is the most appropriate measure of labour input because a simple headcount of employed persons can hide changes in average hours worked and has difficulties accounting for variations in work such as a part-time contract, leave of absence, overtime, or shifts in normal hours. However, the quality of hours-worked estimates is not always clear. In particular, statistical establishment and household surveys are difficult to use because of their varying quality of hours-worked estimates and their varying degree of international comparability.