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Productivity - Wikipedia

Productivity

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Productivity
Productivity is the efficiency of production of goods or services expressed by some measure. Measurements
of productivity are often expressed as a 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, typically over a specific period of time.[1] The
most common example is the (aggregate) labour productivity measure, one example of which is 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
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 to obtain such a ratio-type measure
of productivity.[2]

Productivity is a crucial factor in the 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.[3]

Partial productivity
Productivity measures that use one class of inputs or factors, but not multiple factors, are called partial
productivities.[4] 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.[4]

Before the 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.

Labour productivity
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).

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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.[5] In macroeconomics the
most well-known and used measure of value-added is the gross Labour productivity levels in 2012 in
domestic product or GDP. Increases in it are widely used as a Europe. OECD
measure of the economic growth of nations and industries. GDP is the
income available for
paying capital costs, labor
compensation, taxes and
profits.[6] Some
economists instead use
gross value added (GVA);
there is normally a strong
correlation between GDP
and GVA.[7]

The measure of input use


reflects the time, effort
and skills of the
workforce. The
denominator of the ratio
of labour productivity, the Comparison of average labour productivity levels between the OECD member
input measure is the most states. Productivity is measured as GDP per hour worked. Blue bars = higher than
OECD-average productivity. Yellow bars = lower than average.
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).[7] 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, paid leave, 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.

GDP per capita is a rough measure of average living standards or economic well-being and is one of the core
indicators of economic performance.[8] GDP is, for this purpose, only a very rough measure. Maximizing
GDP, in principle, also allows maximizing capital usage. For this reason, GDP is systematically biased in
favour of capital intensive production at the expense of knowledge and labour-intensive production. The use
of capital in the GDP-measure is considered to be as valuable as the production's ability to pay taxes, profits
and labor compensation. The bias of the GDP is actually the difference between the GDP and the producer
income.[9]

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Another labour productivity measure, output per worker, is often seen as a proper measure of labour
productivity, as here: "Productivity isn't everything, but in the long run it is almost everything. A country's
ability to improve its standard of living over time depends almost entirely on its ability to raise its output per
worker."[10] This measure (output per worker) is, however, more problematic than the GDP or even invalid
because this measure allows maximizing all supplied inputs, i.e. materials, services, energy and capital at the
expense of producer income.

Multi-factor productivity
When multiple inputs are considered, the measure is
called multi-factor productivity or MFP.[5] Multi-factor
productivity is typically estimated using growth
accounting. If the inputs specifically are labor and
capital, and the outputs are value added intermediate
outputs, the measure is called total factor productivity
(TFP].[11] TFP measures the residual growth that cannot
be explained by the rate of change in the services of
labour and capital. MFP replaced the term TFP used in Trends in U.S. productivity from labor, capital and
the earlier literature, and both terms continue in use multi-factor sources over the 1987–2014 period
(usually interchangeably).[12]

TFP is often interpreted as a rough average measure of productivity, more specifically the contribution to
economic growth made by factors such as technical and organisational innovation.[6] The most famous
description is that of Robert Solow's (1957): "I am using the phrase 'technical change' as a shorthand
expression for any kind of shift in the production function. Thus slowdowns, speed ups, improvements in the
education of the labor force and all sorts of things will appear as 'technical change' ." The original MFP
model[13] involves several assumptions: that there is a stable functional relation between inputs and output at
the economy-wide level of aggregation, that this function has neoclassical smoothness and curvature
properties, that inputs are paid the value of their marginal product, that the function exhibits constant returns
to scale, and that technical change has the Hicks’n neutral form.[14] In practice, TFP is "a measure of our
ignorance", as Abramovitz (1956) put it, precisely because it is a residual. This ignorance covers many
components, some wanted (like the effects of technical and organizational innovation), others unwanted
(measurement error, omitted variables, aggregation bias, model misspecification)[15] Hence the relationship
between TFP and productivity remains unclear.[2]

Total productivity
When all outputs and inputs are included in the productivity measure it is called total productivity. A valid
measurement of total productivity necessitates considering all production inputs. If we omit an input in
productivity (or income accounting) this means that the omitted input can be used unlimitedly in production
without any impact on accounting results. Because total productivity includes all production inputs, it is used
as an integrated variable when we want to explain income formation of the production process.

Davis has considered[16] the phenomenon of productivity, measurement of productivity, distribution of


productivity gains, and how to measure such gains. He refers to an article[17] suggesting that the
measurement of productivity shall be developed so that it ”will indicate increases or decreases in the
productivity of the company and also the distribution of the ’fruits of production’ among all parties at

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interest”. According to Davis, the price system is a mechanism through which productivity gains are
distributed, and besides the business enterprise, receiving parties may consist of its customers, staff and the
suppliers of production inputs.

In the main article is presented the role of total productivity as a variable when explaining how income
formation of production is always a balance between income generation and income distribution. The
income change created by production function is always distributed to the stakeholders as economic values
within the review period.

Benefits of productivity growth


Productivity growth is a crucial source of growth in
living standards. Productivity growth means more value
is added in production and this means more income is
available to be distributed.

At a firm or industry level, the benefits of productivity


growth can be distributed in a number of different ways:

to the workforce through better wages and


conditions;
to shareholders and superannuation funds
through increased profits and dividend Labour productivity growth in Australia since
distributions; 1978, measured by GDP per hour worked
(indexed)
to customers through lower prices;
to the environment through more stringent
environmental protection; and
to governments through increases in tax payments (which can be used to fund social and
environmental programs).
Productivity growth is important to the firm because it means that it can meet its (perhaps growing)
obligations to workers, shareholders, and governments (taxes and regulation), and still remain competitive or
even improve its competitiveness in the market place. Adding more inputs will not increase the income
earned per unit of input (unless there are increasing returns to scale). In fact, it is likely to mean lower
average wages and lower rates of profit. But, when there is productivity growth, even the existing
commitment of resources generates more output and income. Income generated per unit of input increases.
Additional resources are also attracted into production and can be profitably employed.

Drivers of productivity growth


In the most immediate sense, productivity is determined by the available technology or know-how for
converting resources into outputs, and the way in which resources are organized to produce goods and
services. Historically, productivity has improved through evolution as processes with poor productivity
performance are abandoned and newer forms are exploited. Process improvements may include
organizational structures (e.g. core functions and supplier relationships), management systems, work
arrangements, manufacturing techniques, and changing market structure. A famous example is the assembly
line and the process of mass production that appeared in the decade following commercial introduction of
the automobile.[18]

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Mass production dramatically reduced the labor in producing parts for and assembling the automobile, but
after its widespread adoption productivity gains in automobile production were much lower. A similar
pattern was observed with electrification, which saw the highest productivity gains in the early decades after
introduction. Many other industries show similar patterns. The pattern was again followed by the computer,
information and communications industries in the late 1990s when much of the national productivity gains
occurred in these industries.[19]

There is a general understanding of the main determinants or drivers of productivity growth. Certain factors
are critical for determining productivity growth. The Office for National Statistics (UK) identifies five
drivers that interact to underlie long-term productivity performance: investment, innovation, skills,
enterprise and competition.[20]

Investment is in physical capital — machinery, equipment and buildings. The more capital
workers have at their disposal, generally the better they are able to do their jobs, producing
more and better quality output.
Innovation is the successful exploitation of new ideas. New ideas can take the form of new
technologies, new products or new corporate structures and ways of working. Speeding up the
diffusion of innovations can boost productivity.
Skills are defined as the quantity and quality of labour of different types available in an
economy. Skills complement physical capital, and are needed to take advantage of investment
in new technologies and organisational structures.
Enterprise is defined as the seizing of new business opportunities by both start-ups and
existing firms. New enterprises compete with existing firms by new ideas and technologies
increasing competition. Entrepreneurs are able to combine factors of production and new
technologies forcing existing firms to adapt or exit the market.
Competition improves productivity by creating incentives to innovate and ensures that
resources are allocated to the most efficient firms. It also forces existing firms to organise work
more effectively through imitations of organisational structures and technology.
Research and development (R&D) tends to increase productivity growth,[21] with public R&D showing
larger spillovers and smaller firms experiencing larger productivity gains from public R&D.[22]

Individual and team productivity


Technology has enabled massive personal productivity gains—computers, spreadsheets, email, and other
advances have made it possible for a knowledge worker to seemingly produce more in a day than was
previously possible in a year.[23] Environmental factors such as sleep and leisure play a significant role in
work productivity and received wage.[24] Drivers of productivity growth for creative and knowledge workers
include improved or intensified exchange with peers or co-workers, as more productive peers have a
stimulating effect on one's own productivity.[25][26] Productivity is influenced by effective supervision and
job satisfaction. An effective or knowledgeable supervisor (for example a supervisor who uses the
Management by objectives method) has an easier time motivating their employees to produce more in
quantity and quality. An employee who has an effective supervisor, motivating them to be more productive is
likely to experience a new level of job satisfaction thereby becoming a driver of productivity itself.[27] There
is also considerable evidence to support improved productivity through operant conditioning
reinforcement,[28] successful gamification engagement,[29] and research-based recommendations on
principles and implementation guidelines for using monetary rewards effectively.[30]

Detrimental impact of bullying, incivility, toxicity and psychopathy

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Workplace bullying results in a loss of productivity, as measured by self-rated job performance.[31] Over
time, targets of bullying will spend more time protecting themselves against harassment by bullies and less
time fulfilling their duties.[32] Workplace incivility has also been associated with diminished productivity in
terms of quality and quantity of work.[33]

A toxic workplace is a workplace that is marked by significant drama and infighting, where personal battles
often harm productivity.[34] While employees are distracted by this, they cannot devote time and attention to
the achievement of business goals.[35] When toxic employees leave the workplace, it can improve the culture
overall because the remaining staff become more engaged and productive.[36] The presence of a workplace
psychopath may have a serious detrimental impact on productivity in an organisation.[37]

In companies where the traditional hierarchy has been removed in favor of an egalitarian, team-based setup,
the employees are often happier, and individual productivity is improved (as they themselves are better
placed to increase the efficiency of the workfloor). Companies that have these hierarchies removed and have
their employees work more in teams are called liberated companies or "Freedom Inc.'s".[38][39][40][41][42]
The Kaizen system of bottom-up, continuous improvement was first practiced by Japanese manufacturers
after World War II, most notably as part of The Toyota Way.

Business productivity
Productivity is one of the main concerns of business management and engineering. Many companies have
formal programs for continuously improving productivity, such as a production assurance program. Whether
they have a formal program or not, companies are constantly looking for ways to improve quality, reduce
downtime and inputs of labor, materials, energy and purchased services. Often simple changes to operating
methods or processes increase productivity, but the biggest gains are normally from adopting new
technologies, which may require capital expenditures for new equipment, computers or software. Modern
productivity science owes much to formal investigations that are associated with scientific management.[43]
Although from an individual management perspective, employees may be doing their jobs well and with
high levels of individual productivity, from an organizational perspective their productivity may in fact be
zero or effectively negative if they are dedicated to redundant or value destroying activities.[23] In office
buildings and service-centred companies, productivity is largely influenced and affected by operational
byproducts—meetings.[44] The past few years have seen a positive uptick in the number of software
solutions focused on improving office productivity.[45] In truth, proper planning and procedures are more
likely to help than anything else.[46]

Productivity paradox
Overall productivity growth was relatively slow from the 1970s through the early 1990s,[47] and again from
the 2000s to 2020s. Although several possible causes for the slowdown have been proposed there is no
consensus. The matter is subject to a continuing debate that has grown beyond questioning whether just
computers can significantly increase productivity to whether the potential to increase productivity is
becoming exhausted.[48]

National productivity

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In order to measure the productivity of a nation or an industry, it is necessary to operationalize the same
concept of productivity as in a production unit or a company, yet, the object of modelling is substantially
wider and the information more aggregate. The calculations of productivity of a nation or an industry are
based on the time series of the SNA, System of National Accounts. National accounting is a system based on
the recommendations of the UN (SNA 93) to measure the total production and total income of a nation and
how they are used.[49]

International or national productivity growth stems from a complex interaction of factors. Some of the most
important immediate factors include technological change, organizational change, industry restructuring and
resource reallocation, as well as economies of scale and scope. A nation's average productivity level can also
be affected by the movement of resources from low-productivity to high-productivity industries and
activities. Over time, other factors such as research and development and innovative effort, the development
of human capital through education, and incentives from stronger competition promote the search for
productivity improvements and the ability to achieve them. Ultimately, many policy, institutional and
cultural factors determine a nation's success in improving productivity.

At the national level, productivity growth raises living standards because more real income improves
people's ability to purchase goods and services (whether they are necessities or luxuries), enjoy leisure,
improve housing and education and contribute to social and environmental programs. Some have suggested
that the UK's 'productivity puzzle' is an urgent issue for policy makers and businesses to address in order to
sustain growth.[50] Over long periods of time, small differences in rates of productivity growth compound,
like interest in a bank account, and can make an enormous difference to a society's prosperity. Nothing
contributes more to reduction of poverty, to increases in leisure, and to the country's ability to finance
education, public health, environment and the arts’.[51]

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Productivity is considered basic statistical information for many international comparisons and country
performance assessments and there is strong interest in comparing them internationally. The OECD[52]
publishes an annual Compendium of Productivity Indicators[53] that includes both labor and multi-factor
measures of productivity.

See also
Agile construction
Computer-aided manufacturing
Counterproductive work behavior
Division of labour
Industrial Revolution
Productive and unproductive labour
Productive forces
Productivity model
Production–possibility frontier
Return on time invested
Second Industrial Revolution

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World Bank, 2020. Global Productivity: Trends, Drivers, and Policies (https://www.worldbank.or
g/en/research/publication/global-productivity). Edited by Alistair Dieppe.
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Caves, Douglas W & Christensen, Laurits R & Diewert, W Erwin, March 1982. "Multilateral
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Caves, Douglas W & Christensen, Laurits R & Diewert, W Erwin, November 1982. "The
Economic Theory of Index Numbers and the Measurement of Input, Output, and Productivity",
Econometrica, vol. 50(6), pp. 1393–1414.
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Malmquist productivity index", Journal of Productivity Analysis, Springer, vol. 33(2), pp. 97–
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Analysis". Omega. The International Journal of Management Science. 20 (5/6): 553–568.
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O).
Jorgenson, D. W.; Griliches, Z. (1967). "The Explanation of Productivity Change". The Review
of Economic Studies. 34 (99): 249–283. doi:10.2307/2296675 (https://doi.org/10.2307%2F2296
675). JSTOR 2296675 (https://www.jstor.org/stable/2296675). S2CID 154527429 (https://api.se
manticscholar.org/CorpusID:154527429).
Jorgenson, D. W.; Ho, M. S.; Samuels, J. D. (2014). Long-term Estimates of U.S. Productivity
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Göös. p. 335.
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Schreyer, P. (2005). Measuring Productivity (https://web.archive.org/web/20200331141626/htt
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ee/ejores/v174y2006i2p1076-1086.html). European Journal of Operational Research, vol.
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"2020 Home Office Productivity Set Up" (https://www.contentthatsticks.org/2020-home-office-st
udy-productivity-set-up)

External links
Field, Alexander J. (2008). "Productivity" (http://www.econlib.org/library/Enc/Productivity.html).
In David R. Henderson (ed.). Concise Encyclopedia of Economics (2nd ed.). Indianapolis:
Library of Economics and Liberty. ISBN 978-0865976658. OCLC 237794267 (https://www.worl
dcat.org/oclc/237794267).
Productivity and Costs – Bureau of Labor Statistics (http://www.bls.gov/lpc/) United States
Department of Labor: contains international comparisons of productivity rates, historical and
present
Productivity Statistics—Organisation for Economic Co-operation and Development (http://www.
oecd.org/department/0,3355,en_2649_29964795_1_1_1_1_1,00.html)
Greenspan Speech (https://www.federalreserve.gov/BOARDDOCS/SPEECHES/1996/1996101
6.htm)
OECD estimates of labour productivity levels (http://stats.oecd.org/WBOS/Index.aspx?Dataset
Code=LEVEL)

Handbooks
Measuring Productivity—OECD Manual (http://www.oecd.org/std/productivity-stats/2352458.pd
f)
Bureau of Labor Statistics, Productivity Statistics (U.S.) (http://www.bls.gov/bls/productivity.ht
m)

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