Economic Growth

What is productivity, and how do you measure it?

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Many of the world’s biggest economies have been experiencing falling productivity. Image: REUTERS/Tony Gentile

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Productivity, or lack of it, is a key issue for economies across the globe. Productivity is good for individuals, companies and countries, according to economists. But what does it actually mean?

What is productivity?

At its simplest, labour productivity is the amount of output per worker. The productivity of a factory worker making footballs, for example, could be measured by how many footballs they make in one hour. The more they produce, the more they contribute to profits for the company.

 Growth of GDP, Per Capita Income and Labour Productivity 2015

How do you compare it?

If everyone made footballs in factories, it would be simple to compare people’s productivity. Of course, the real world is infinitely more complex.

The task of measuring productivity has to consider many elements. In simple terms, the Harvard Business Review says: take the units of output, in other words the product, and divide that by the units of input, in other words things like capital, labour and materials.

Again, though, it is usually a bit more complex than that. What about a worker who doesn’t produce something physical but rather sits in an office typing? It also becomes tricky when you bring salaries into the mix, where an employee who produces little may earn a very high salary or vice versa.

There is also the quality factor. If a worker is producing high-quality products – a Swiss watchmaker, for example – they may need more time to make it.

Economists have to consider all these factors when calculating their productivity figures. It is worth the effort, though, as productivity is an important measure of a country’s economic performance.

What’s happening to productivity?

Many of the world’s biggest economies have been experiencing falling productivity.

In the United States, labour productivity decreased at a 0.6% annual rate during the first quarter of this year. The UK’s productivity is 18% below the average of other leading Western economies, its worst performance since records began back in the 1990s.

 Productivity slowdown in advanced economies. GDP per hour worked, % change at annual rate

Figures from 2013 show that France is 13% more productive than the UK. That’s despite French employees working fewer hours than their peers in the UK, and the country having more protective employment laws. So is the French model the blueprint for productivity?

Average weekly hours per worker, G7 countries

1993 to 2014 - Average weekly hours for selected countries
Image: Office of National Statistics

What’s causing the fall?

All of the G7 countries are experiencing falling productivity, but Britain more than most.

Policy-makers have been struggling to explain the causes, with the Bank of England calling it the “productivity puzzle”.

According to research from the Chartered Management Institute, it found that an “always on” work culture of ever increasing hours and rocketing stress levels could be one of the driving forces behind the UK’s poor productivity.

Does innovation improve productivity?

It was widely assumed that with the advancement of technology, employees would become more productive. Yet some of the most advanced economies are the ones struggling with productivity.

In the US, the current global IT revolution has not had the grand impact that previous innovations like electricity and plumbing had on productivity. That’s according to economist Robert Gordon, who says: “The positive effect of instant messaging and video gaming on productivity and living standards pales in comparison”.

Jared Bernstein, a former chief economist to Vice-President Joe Biden, says technology hasn’t stalled, but for some unforeseen reason, the level of productivity it brings doesn’t trickle down to smaller sectors. In most OECD countries, the drop in productivity has been particularly marked in those industries where new digital and technological innovations were expected to generate productivity dividends, such as in the information, communication, finance and insurance sectors.

Many challenges lie ahead for the countries lagging behind on productivity, and economists have been debating this question of how to improve productivity for years.

Some of the ideas that have come up for improving it include better investment in staff and technology, structural and management improvements, and helping people develop their skills set. Or you can take Thomas Edison’s advice: “There is no substitute for hard work.”

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