Productivity

Productivity formula

Productivity is measured as a ratio of output to the input consumed:

\(\hbox{Productivity}=\frac{\hbox{Units of output}}{\hbox{Unitis of input}}\)

If the output produced increases while the amount of inputs remains the same, we say that the productivity has increased. Productivity increases as well when the same amount of output is produced with fewer inputs.

Productivity and production

It is a common problem that students confuse productivity with production. Both concepts are closely related but their meaning is different. Let’s explore them in detail.

To give you a full image of the difference between productivity and production, we have created the comparison chart below.

Types of productivity

You should know that for most purposes, productivity usually refers to labour productivity. However, other types of productivity are differentiated based on the production factors as they all contribute to a firm’s current output level and any output increase. Thus, the types of productivity, besides labour productivity, also include:

• Land productivity
• Capital productivity
• Entrepreneurial productivity

Labour productivity

Labour productivity is a measure of the amount of output produced by a worker in a given time period, such as an hour, day, or week. It is calculated by dividing the amount of output produced by the number of hours worked. Higher labor productivity can lead to higher profits for businesses and higher wages for workers.

Labour productivity formula

Labour productivity is calculated by using the following formula:

\(\hbox{Labour productivity}=\frac{\hbox{Output produced}}{\hbox{Labour input}}\)

Before we look at an example, note that labour input can be measured as the number of people employed or the number of labour hours (working hours). Therefore, labour productivity can be expressed as per worker or per hour worked.

The importance of productivity

Productivity is important for maintaining and increasing economic welfare and prosperity as it can contribute to the following factors:

• Higher profits. Productivity improvements mean that firms can increase their profits as the costs are now lower to produce a given level of output.

• Lower prices. As productivity improves, not only do firms enjoy the benefits, but consumers also benefit. Consumers can enjoy lower prices of goods and products as the firms can offer that without reducing their profits or wages.

• Higher wages. If productivity increases, the total costs of a firm fall and the firm is expected to increase workers’ wages. Profits can offset the effect of wage increases.

• Economic growth. Increasing productivity allows firms and consumers to get faster and more of what they want in the same time. Firms produce a greater output using the same input level, increasing their revenues and profits and generating higher GDP. This leaves productivity improvements as the main drivers of higher living standards in the long term.

Why is UK productivity low?

Low labour productivity in the UK in recent years has been called the ‘productivity puzzle’.

While countries such as Germany and the USA improved their productivity level after the 2009 recession, the UK failed to recover from the low level of labour productivity. What made the UK economy perform less compared to other countries?

These are the factors that explain the productivity puzzle and that negatively impacted productivity:

• Inadequate investment in new capital goods: if capital goods are not well maintained or of a good standard, this will significantly impact how well workers can do their jobs and lead to lower rates of productivity.

• Relatively low wages in the UK economy: workers having high wages can be a good motivator for increasing their productivity. Lower wages, on the other hand, would serve as a demotivating force.

• Employers used the wrong methods to manage the labour force: during the recession, employers would choose to use workers less intensively rather than laying them off. This would then cause a fall in labour productivity.

These are, thus, some of the factors that improve productivity:

• Proper workforce: selecting the right employees for the right job leads to higher productivity.

• Proper types of equipment and machinery: selecting and acquiring the right machines that can perform simplified and repetitive tasks strictly matching the requirements ensures better functioning of labour and, therefore higher productivity.

• The total area and its location: the total area of different departments and the location of these departments play a major role in productivity as it can smooth the whole process of production.

• The use of economic and renewable sources of energy: using renewable sources of energy has also proved to improve productivity significantly.

• Proper management of all production factors: making the right choices aiming for the optimum utilisation of the production factors (especially capital and labour) would positively affect productivity.