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In economics, productivity is the amount of output created (in terms of goods produced or services rendered) per unit input used. For instance, labour productivity is typically measured as output per worker or output per labour-hour. With respect to land, the "yield" is equivalent to "land productivity". As Henry Hazlitt explains in Economics in One Lesson, increasing production reduces prices, and therefore goods become more widely available. Automobiles, for example, were initially hand made and only available to the wealthy. As productivity increased, and the price of automobiles fell, they became widely available to the general population.
Measures of factor productivity
Some economists write of "capital productivity" (output per unit of capital goods employed), the inverse of the capital/output ratio. "Total factor productivity," sometimes called multifactor productivity, also includes both labor and capital goods in the denominator (weighted by their incomes). So multifactor productivity would be output per unit of combined labor and capital inputs.
Unlike labor productivity, the calculation of both capital productivity and total factor productivity is dependent on a number of doubtful assumptions and is subject to the Cambridge critique. Even measures of land and labor productivity should be used only when conscious of the role of the heterogeneity of these inputs to the production process.
Productivity studies analyze technical processes and engineering relationships such as how much of an output can be produced in a specified period of time (see also Taylorism).
It is related to the concept of efficiency. While productivity is the amount of output produced relative to the amount of resources (time and money) that go into the production, while efficiency is the value of output relative to the cost of inputs used. Productivity improves when the quantity of output increases relative to the quantity of input. Efficiency improves, when the cost of inputs used is reduced relative the value of output. A change in the price of inputs might lead a firm to change the mix of inputs used, in order to reduce the cost of inputs used, and improve efficiency, without actually increasing the quantity of output relative the quantity of inputs. A change in technology, however, might allow a firm to increase output with a given quantity of inputs; such an increase in productivity would be more technically efficient, but might not reflect any change in allocative efficiency.
All else constant, it benefits a business to improve productivity, which over time lowers cost and (hopefully) improves ability to compete and make profit. Increases in productivity also influence society more broadly, by improving living standards, creating income, and generating economic growth.
Increases in productivity
Companies can increase productivity in a variety of ways. The most obvious methods involve automation and computerization which minimize the tasks that must be performed by employees. Recently, less obvious techniques are being employed that involve ergonomic design and worker comfort. A comfortable employee, the theory maintains, can produce more than a counterpart who struggles through the day. In fact, some studies claim that measures such as raising workplace temperature can have a drastic effect on office productivity. Experiments done by the Japanese Shiseido corporation also suggested that productivity could be increased by means of perfuming or deodorising the air conditioning system of workplaces.
Increases in productivity also can influence society more broadly, by improving living standards, and creating income. They are central to the process generating economic growth and capital accumulation.
A new theory suggests that the increased contribution that productivity has on economic growth is largely due to the relatively high price of technology and its exportation via trade, as well as domestic use due to high demand, rather than attributing it to micro economic efficiency theories which tend to downsize economic growth and reduce labor productivity for the most part.
Many economists see the economic expansion of the later 1990s in the United States as being allowed by the massive increase in worker productivity that occurred during that period. The growth in aggregate supply allowed increases in aggregate demand and decreases in unemployment at the same time that inflation remained stable. Others emphasize drastic changes in patterns of social behaviour resulting from new communication technologies and changed male-female relationships.
Labour productivity is generally speaking held to be the same as the "average product of labour" (average output per worker or per worker-hour, an output which could be measured in physical terms or in price terms).
It is not the same as the marginal product of labour, which refers to the increase in output that results from a corresponding increase in labour input.
However, some aspects of labour productivity may be very difficult to measure exactly, or in an unbiased way, such as:
- the intensity of labour-effort, and the quality of labour effort generally.
- the creative activity involved in producing technical innovations.
- the relative efficiency gains resulting from different systems of management, organisation, co-ordination or engineering.
- the productive effects of some forms of labour on other forms of labour.
One important reason is that these aspects of productivity refer mainly to its qualitative, rather than quantitative, dimensions. We might be able to observe definite increases in output, even though we do not know what those increases should be attributed to.
This insight becomes particularly important when a large part of what is produced in an economy consists of services. Management may be very preoccupied with the productivity of employees, but the productivity gains of management itself might be very difficult to prove.
This may mean that a lot of what is said about productivity is based on opinion, rather than empirical evidence. Modern management literature emphasizes the important effect of the overall work culture or organisational culture that an enterprise has. But again the specific effects of any particular culture on productivity may be unprovable.
Marx on productivity
In Karl Marx's labour theory of value, the concept of capital productivity is rejected as an instance of reification, and replaced with the concepts of the organic composition of capital and the value product of labor.
A sharp distinction is drawn by Marx for the productivity of labor in terms of physical outputs produced, and the value or price of those outputs. A small physical output might create a large value, while a large physical output might create only a small value - with obvious consequences for the way the labor producing it would be rewarded in the marketplace.
Moreover if a large output value was created by people, this did not necessarily have anything to do with their physical productivity; it could be just due to the favorable valuation of that output when traded in markets. Therefore, merely focusing on an output value realised, to assess productivity, might lead to mistaken conclusions.
In general, Marx rejected the possibility of a concept of productivity that would be completely neutral and unbiased by the interests or norms of different social classes. At best, one could say that objectively, some practices in a society were generally regarded as more or less productive, or as improving productivity - irrespective of whether this was really true. In other words, productivity was always interpreted from some definite point of view.
Typically, Marx suggested in his critique of political economy, only the benefits of raising productivity were focused on, rather than the human (or environmental) costs involved. Thus, Marx could even find some sympathy for the Luddites, and he introduced the critical concept of the rate of exploitation of human labour power to balance the obvious economic progress resulting from an increase in the productive forces of labor.
- Production, costs, and pricing
- Production theory basics
- Production possibility frontier
- Production function
- Computer-aided manufacturing
- Productive and unproductive labour
- Productive forces
- Productivity and Costs – Bureau of Labor Statistics United States Department of Labor: contains international comparisons of productivity rates, historical and present
- The 3/2 Rule of Employee Productivity, financial research a building business case (when you add 10% employees the profitability of each drops by 6.3%)
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