What is productivity.
Simply put, productivity measures the amount of value created for each hour that is worked in a society.
Focus up: you probably know that the amount of work you can get done in one day is your rate of productivity. Productivity in economics is pretty much the same as productivity at your desk. But for companies or even countries, measuring productivity is a little more complex than how well you were able to hold a video call over the construction noise from the street or your cat’s incessant meowing.
On a country scale, productivity can mean the difference between good and not-so-good standards of living. For a company, productivity can determine whether it can afford to increase wages for its employees or even if it can continue operating. Stagnating or contracting productivity can spell serious trouble ahead for individuals, organizations, and nations alike.
Understanding what economic productivity is and how it works is critical to working toward maintaining and increasing it. Here, we’ll take a deep dive into the theory and practice of productivity.
What are the different kinds of productivity?
We’ve already touched on labor productivity. On a country scale, labor productivity is frequently calculated as a ratio of GDP per total hours worked. So if a country’s GDP were $1 trillion and its people worked 20 billion hours to create that value, the country’s labor productivity would be $50 per hour. Labor productivity growth is crucial to increased wages and standards of living, and it helps increase consumers’ purchasing power.
Economists measure other types of productivity, too. Capital productivity is a measure of how well physical capital—such as real estate, equipment, and inventory—is used to generate output such as goods and services. (Capital productivity and labor productivity are frequently considered together as an indicator of a country’s overall standard of living.) And total factor productivity is the portion of growth in output not explained by growth in labor or capital. You could call this type of productivity “innovation-led growth.”
Why is productivity growth slowing in advanced countries?
In the United States and Western Europe, labor productivity growth has been declining ever since a boom in the 1960s. The story is a little different in each country. In the United States and Sweden, for example, there was strong productivity growth from the mid-1990s to the early 2000s, followed by the largest decline in productivity growth among countries surveyed (due to financial crisis aftereffects and uncertainty). In Italy and Spain, however, productivity growth was close to zero for years before the financial crisis in 2008, which meant that the severe contraction in the labor market after the crisis actually accelerated productivity growth.
Across the sample of countries in Western Europe and North America, there have been three micro patterns of productivity slowdown. First, for a variety of reasons, the recovery from the 2008 financial crisis has created a job-rich but productivity-weak environment. Next, the few sectors that are experiencing accelerated productivity growth are too small or moving too slowly to shift the overall numbers. Finally, technological development hasn’t had the boosting effect on labor productivity that it has in the past. To some analysts, this state of affairs seems like a reappearance of the Solow Paradox of the 1980s, named for economist Robert Solow who observed in 1987 that the gathering momentum of the computer age wasn’t reflected in productivity statistics. The original Solow Paradox was resolved in the 1990s when a few sectors—technology, retail, and wholesale—led an acceleration of US productivity growth. It remains to be seen when—or whether—the current productivity paradox will be resolved.
The productivity paradox, also referred to as the Solow paradox, could refer either to the slowdown in productivity growth in the United States in the 1970s and 1980s despite rapid development in the field of information technology (IT) over the same period, or to the slowdown in productivity growth in the United States and developed countries from the 2000s to 2020s; sometimes the newer slowdown is referred to as the productivity slowdown, the productivity puzzle, or the productivity paradox 2.0. The 1970s to 1980s productivity paradox inspired many research efforts at explaining the slowdown, only for the paradox to disappear with renewed productivity growth in the developed countries in the 1990s. However, issues raised by those research efforts remain important in the study of productivity growth in general, and became important again when productivity growth slowed around the world again from the 2000s to the present day.