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Productivity | Definition, Measurement, Types, Examples, & Facts | Britannica Money Table of Contents Introduction Uses of productivity measurement Index of growth Measure of efficiency Wage and price analysis Factors that determine productivity levels Measurement of productivity Output Inputs Historical trends Early industrialization The postwar growth surge References Read More 5 ways that artificial intelligence is changing how we work economic growth economic development Table Of Contents productivity economics Print Cite Share Links Written by Marvin Frankel , Marvin Frankel Emeritus Professor of Economics, University of Illinois at Urbana-Champaign. Author of British and American Manufacturing Productivity: A Comparison and Interpretation. John W. Kendrick John W. Kendrick Emeritus Professor of Economics, George Washington University, Washington, D.C. Former Chief Economist, U.S. Department of Commerce. Author of Productivity Trends in the United States. 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(Digital File Number: cph 3c10411 ) Key People: Sir Arthur Lewis productivity , in economics , the ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output of some category of goods divided by the total input of, say, labour or raw materials. In principle, any input can be used in the denominator of the productivity ratio. Thus, one can speak of the productivity of land, labour, capital, or subcategories of any of these factors of production. One may also speak of the productivity of a certain type of fuel or raw material or may combine inputs to determine the productivity of labour and capital together or of all factors combined. The latter type of ratio is called “total factor” or “multifactor” productivity, and changes in it over time reflect the net saving of inputs per unit of output and thus increases in productive efficiency. It is sometimes also called the residual, since it reflects that portion of the growth of output that is not explained by increases in measured inputs. The partial productivity ratios of output to single inputs reflect not only changing productive efficiency but also the substitution of one factor for another—e.g., capital goods or energy for labour . Labour is by far the most common of the factors used in measuring productivity. One reason for this is, of course, the relatively large share of labour costs in the value of most products. A second reason is that labour inputs are measured more easily than certain others, such as capital. This is especially true if by measurement one means simply counting heads and neglecting differences among workers in levels of skill and intensity of work. In addition, statistics of employment and labour-hours are often readily available, while information on other productive factors may be difficult to obtain. Although ratios of output to persons engaged in production or to labour-hours are referred to as labour productivity, the term does not imply that labour is solely responsible for changes in the ratio. Improvements in output per unit of labour may be due to increased quality and efficiency of the human factor but also to many other variables discussed later. There is special interest in labour productivity measures, however, since human beings are the end as well as a means of production. The productivity of land , though it receives considerably less attention than the productivity of labour, has been of historical interest. In ancient and preindustrial times the products of the soil constituted the bulk of total output, and land productivity thus constituted the major ingredient in a people’s standard of living . Soil of low productivity could, and over much of the Earth still does, mean poverty for a region’s inhabitants. It is, however, no longer generally believed, as it was in past centuries, that a country’s economic well-being is inevitably tied to the productive powers of the land, and the productive potential of the land itself has proved to be not fixed but greatly expandable through the use of modern agricultural methods. Moreover, industrialization, where it has taken place, has greatly reduced people’s dependence on agriculture . These circumstances, together with expanding opportunities for trade, have enabled some countries to overcome in substantial degree the handicaps of a meagre agricultural endowment. The productivity of capital —plant, equipment, tools, and other physical aids—is a subject of long-standing interest to economists, though concern with its empirical aspects is of more recent origin. Improved statistical reporting and the availability of data in some industrially advanced countries, notably since World War II , have encouraged systematic efforts to measure the productivity of this factor. Compared with achievements in measuring labour productivity, however, the progress realized has been quite limited. There are considerable theoretical and practical difficulties to be overcome. Uses of productivity measurement Index of growth A nation or an industry advances by using less to make more. Labour productivity is an especially sensitive indicator of this economizing process and is one of the major measures used to chart a nation’s or an industry’s economic advance. An overall rise in a nation’s labour productivity signifies the potential availability of a larger quantity of goods and services per worker than before and, accordingly, a potential for higher real income per worker. Countries with high real wages are usually also those with high labour productivity, while those with low real wages are generally low in productivity. If, for the moment, other productive factors are neglected, one can see that the wage level will then be equal to the total national product divided by the number of workers; that is, it will be equal to the level of labour productivity. The change in a nation’s overall labour productivity during any given interval represents the sum of changes in the major economic sectors and industries. Some sectors and industries move ahead more rapidly than the overall average while others may gain more slowly or even decline. In the movement of a country from a level of low productivity and low income to one of high productivity and high income a strategic role is played by the industrial, rather than by the agricultural and other, sectors. In the late 18th and early 19th centuries the effect of the Industrial Revolution was felt first in the manufacture of woolen and cotton textiles, power generation, the metal trades, and machine-making industries. Along with the development of new processes came the development of new products and services that formed the basis for new industries. An outstanding feature of these changes was an increased labour productivity that in turn laid the foundations for an enormous expansion of output. Technological change exerted its influence irregularly and unevenly and continues to do so. In the compilation of overall averages this diversity is concealed because high rates in some industries offset low rates in others. Thus, the rate of increase of productivity for the economy as a whole varies within narrower limits than the spread of rates among individual industries would suggest. Aside from erratic short-term movements, the rate of growth of productivity may appear to be fairly stable over extended periods. A surge of labour-saving innovations would cause the overall average rate to move higher, while a technological lull would depress the average rate. History suggests that the surges tend to be associated with basic technological changes such as, for example, the steam engine , the gasoline engine , the electric motor , and the concept of the standardization of parts. Once introduced, such inventions or developments are used in many different industries. These surges tend also to be associated with such developments as, for instance, employment of the open-hearth furnace in steel manufacture or the introduction of the steam railroad. Productivity is valuable also as an indicator of comparative rates of change among industries and products. Growth in general can be better understood if the relative contributions of individual industries and the circumstances underlying productivity changes in each of these industries are understood. Measure of efficiency Productivity is also used to measure efficiency, as an aid in economic planning and forecasting , and as a means of assessing the uses to which resources are being put. As to the first of these, the efficiency of industrial operations, for instance, may be evaluated by the yardstick of output per worker or machine, and such a yardstick may also provide the basis for supplemental or premium payments for workers. When pay is based on piecework alone, labour productivity becomes the sole determinant. Productivity may also serve as a standard for grading and evaluating any group of workers performing common tasks, distinguishing the more from the less productive. And applied to equipment, productivity standards can indicate when a machine is perfo