productivityeconomics

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.