Productivity – definition and evaluation

Productivity is the output per input in a period of time

  • Labour productivity measures the output per worker in a period of time.
  • If productivity rises, firms can produce more with the same number of workers. This enables
  • Higher wages for workers
  • Increased output for the economy
  • A reduction in costs. A firm can produce the same quantity with fewer workers, leading to lower average costs. This can lead to lower prices or at least keep prices low.

labour-productivity-2003

Labour productivity in the UK. From 2003 Q1 to 2008 Q1 the index of labour productivity rose from 92 to just under 100. A rise of 8.6%.

Evaluation of labour productivity

  • Increasing productivity is only part of the equation. There must be demand for the product.
  • Increasing labour productivity might require expensive investment in capital. The cost savings from higher productivity need to be higher than the capital investment.
  • If real wages rise, it becomes more important to increase labour productivity.
  • If wages are low and capital is expensive, firms may place less emphasis on labour productivity and choose more labour intensive methods of production

 

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