What Is Productivity and How to Measure It Explained

What Is Productivity?

Productivity, in economics, measures output per unit of input, such as labor, capital, or any other resource. It is often calculated for the economy as a ratio of gross domestic product (GDP) to hours worked.

Labor productivity may be further broken down by sector to examine trends in labor growth, wage levels, and technological improvement. Corporate profits and shareholder returns are directly linked to productivity growth.

At the corporate level, productivity is a measure of the efficiency of a company's production process, it is calculated by measuring the number of units produced relative to employee labor hours or by measuring a company's net sales relative to employee labor hours.

Key Takeaways

  • Productivity, in economics, measures output per unit of input.
  • When productivity fails to grow significantly, it limits potential gains in wages, corporate profits, and living standards.
  • The calculation for productivity is output by a company divided by the units used to generate that output.
  • Auto giant Toyota and online marketplace king Amazon are prime examples of businesses with an impressive level of productivity.
  • Productivity in the workplace refers simply to how much "work" is done over a specific period of time.
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Productivity

Understanding Productivity

Productivity is the key source of economic growth and competitiveness.

A country’s ability to improve its standard of living depends almost entirely on its ability to raise its output per worker (i.e., producing more goods and services for a given number of hours of work). Economists use productivity growth to model the productive capacity of economies and determine their capacity utilization rates. This, in turn, is used to forecast business cycles and predict future levels of GDP growth.

In addition, production capacity and utilization are used to assess demand and inflationary pressures.

4 Types of Productivity Measures

Labor Productivity

The most commonly reported productivity measure is labor productivity published by the Bureau of Labor Statistics. This is based on the ratio of GDP to total hours worked in the economy. Labor productivity growth comes from increases in the amount of capital available to each worker (capital deepening), the education and experience of the workforce (labor composition), and improvements in technology (multi-factor productivity growth).

However, productivity is not necessarily an indicator of the health of an economy at a given point in time. For example, in the 2009 recession in the United States, output and hours worked were both falling while productivity was growing (hours worked were falling faster than output).

Gains in productivity can occur both in recessions and in expansions—as it did in the late 1990s—so one needs to take economic context into account when analyzing productivity data.

Total Factor Productivity

There are many factors that impact a country’s productivity. Such things include investment in plant and equipment, innovation, improvements in supply chain logistics, education, enterprise, and competition.

The Solow residual, which is usually referred to as total factor productivity, measures the portion of an economy’s output growth that cannot be attributed to the accumulation of capital and labor.

It is interpreted as the contribution to economic growth made by managerial, technological, strategic, and financial innovations.

Also known as multi-factor productivity (MFP), this measure of economic performance compares the number of goods and services produced to the number of combined inputs used to produce those goods and services. Inputs can include labor, capital, energy, materials, and purchased services.

Capital Productivity

Capital as a productivity measure looks at how efficiently physical capital is being used to create goods or services. Physical capital includes tangible items, such as office equipment, labor materials, warehouse supplies, and transportation equipment (cars and trucks).

Capital productivity is calculated by subtracting liabilities from physical capital. You then divide the sales number by the difference. A higher capital productivity number shows that physical capital is being used efficiently in the creation of goods and services while a lower capital productivity number shows the opposite.

Material Productivity

Measuring productivity by materials looks to measure output by the materials consumed. Materials consumed can be heat, fuel, or chemicals in the process to create a good or service. It analyzes the output generated per unit of material consumed.

Productivity and Investment

When productivity fails to grow significantly, it limits potential gains in wages, corporate profits, and living standards. Investment in an economy is equal to the level of savings because investment has to be financed from savings. Low savings rates can lead to lower investment rates and lower growth rates for labor productivity and real wages. This is why it is feared that when savings rates in the U.S. are low, it could hurt productivity growth in the future.

A big question is what role quantitative easing and zero interest rate policies (ZIRP) have played in encouraging consumption at the expense of saving and investment. For instance, during periods of lax monetary policy where credit is accessible and affordable, consumers are more likely to incur debt and decrease savings in pursuit of mortgages, loans, or other major purchases. It is only when monetary policy is tightened and rates rise that the economy encourages saving and ultimately future investment.

Important

Productivity is largely determined by the technologies available and management's willingness and know-how to make process improvements.

Companies can also choose to spend money on short-term investments and share buybacks rather than investing in long-term capital. Some economists call for corporate tax reform to better incentivize investment in manufacturing, infrastructure, or long-term assets. For now, entities may still pursue long-term investment endeavors to maximize efficiency and productivity; however, for some, it may be easier and worth more to pursue short-term capital strategies.

Last, some economists may argue the pre-pandemic society will continue to bolster productivity growth in the future. The reasoning behind this theory is workers can now focus more on "higher-value" tasks relying on technology, mobility, and scalability. As more entities shift away from strictly on-premises operations, greater infrastructure investments are needed to handle a hybrid or fully-remote entity.

How to Calculate Productivity

The calculation for productivity is straightforward: divide the outputs of a company by the inputs used to produce that output. The most regularly used input is labor hours, while the output can be measured in units produced or sales.

For instance, if a factory produced 10,000 widgets last month while being billed for 5,000 hours worth of labor, productivity would simply be two widgets per hour (10,000 / 5,000).

Sales can also be used as a measure of output. For that factory, let's say 10,000 widgets translates into $1 million dollars in sales. One simply needs to divide the $1 million figure by 5,000 labor hours in order to get the productivity number: $200 in sales for each hour of labor.

Real-World Example

Auto manufacturing giant Toyota offers a prime example of high-end productivity in real life. The company has very humble beginnings but has grown to become one of the largest and most productive car manufacturers in the world. Its "Toyota Production System" (TPS) is one of the main reasons for that.

TPS includes a few of the following principles:

  • An environment of constant learning and improvement
  • Standardizing systems for consistent quality
  • The elimination (not just reduction) of waste

By enacting TPS practices into its manufacturing every day, Toyota ensures the company is continually improving, operating at a high standard, and resources are not being lost.

What Are the 4 Essential Components of Productivity?

Productivity can be looked at in a variety of ways, particularly if one is referring to the productivity of an individual or of a corporation. For an individual, the four essential components of productivity include (1) strategy, or the ability to plan, (2) focus, or the ability to pay attention to one task at a time, (3) productive choosing, or the ability to choose the most important tasks and make the right choices, and (4) consistency, the ability to work at a consistent pace and incorporate all of the above in your tasks.

What Is Productivity in the Workplace?

Productivity in the workplace refers simply to how much "work" is done over a specific period of time. Depending on the nature of the company, the output can be measured by things like customers acquired, phone calls made, and, of course, sales gained. An overarching goal of a company should be to maximize productivity without sacrificing product quality and being efficient with company resources.

How Can You Improve Personal Productivity?

Some basic ways to increase personal productivity on a daily basis include:

  • Listing tasks in order of importance and tackling them one by one
  • Completing your most hated tasks before all the others
  • Taking well-calculated breaks to boost overall production
  • Exercising regularly
  • Eating a healthy diet


What Factors Affect Productivity?

In the workplace, factors that affect productivity include compensation (salary/wage), work environment, training, career development opportunities, wellness, diversity, increased responsibility, and management quality.

How Do You Show Productivity at Work?

Ways to show productivity at work are setting goals, focusing on one task at a time, meeting deadlines, being on time, taking breaks, focusing on the largest tasks first, blocking out your calendar, having productive meetings, and delegating tasks.

The Bottom Line

The concept of productivity is simple: at a given level of input, there is a given level of output. More productive societies and processes will yield more output at the same level of input.

Whether it is viewed from an economic standpoint, company standpoint, or personal standpoint, being able to measure and track productivity can be crucial to long-term success.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. U.S. Bureau of Labor Statistics. "Productivity."

  2. National Bureau of Economic Research. "Do Workers Work Harder During Economic Downturns?"

  3. Federal Reserve Bank of St. Louis. "The 1990s Acceleration in Labor Productivity: Causes and Measurement."

  4. U.S. Bureau of Labor Statistics. "What Is Multifactor Productivity?"

  5. Toyota. "Toyota Production System."

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