Productivity is the measure of a business's or country's output compared to its input. The outputs in this respect are products and services. Inputs are labor, capital goods, and materials.
Learning about the concept of productivity can help you understand why wages haven't kept pace with other measures of economic growth.
What Is Productivity?
High productivity occurs when there are less labor and material costs used to produce the same amount or more. When less labor is used to produce more, it creates greater profit and gives a company, industry, or country an advantage over any competition.
If you feel you are working hard but are making less and have fewer opportunities, you are not alone. The workforce is changing and so are employers' desired education, experience, and skill levels. In part, this is due to outsourcing, automation, and advances in technology.
How Does Productivity Work?
Governments use productivity measures to evaluate whether laws, taxes, and other policies increase or impede business growth. Central banks also analyze productivity to see how well the economy is using total capacity. Businesses analyze productivity in processes, manufacturing, and sales to improve the bottom line.
If productivity is low, then the economy is generally in a recession. If capacity utilization is high, then the economy may be in danger of inflation. For these reasons, productivity growth is desired because it generally produces a higher quality of life for residents.
Calculating National Productivity Trends
Productivity is a ratio that describes the output divided by the input. The gross domestic product (GDP) is the total output of a country and can be used to calculate its productivity in a few different ways. A positive result from these formulas is a gain in productivity, while a negative one reflects a decrease in productivity.
There are a few different ways to represent the amount of input of a country has. The number of workers in a country or the total number of hours worked can both represent the total input of a country. The formula for GDP per worker results in a representation of each worker's contribution to GDP. A higher number can indicate an efficient workforce, based on higher GDP or lower worker numbers:
GDP Per Worker = Gross Domestic Product ÷ Number of Workers
The most frequently used ratio measures the productivity of labor in a country, using total hours worked. The GDP is divided by the total hours worked, which gives GDP per hour—a measurement that gives the hourly productivity of a country:
Labor Productivity = Gross Domestic Product ÷ Hours Worked
The U.S. Bureau of Labor Statistics measures hours worked by employees, proprietors, and unpaid family workers. It also uses an index for both GDP and hours worked.
U.S. Productivity Trends
Productivity growth in the U.S. was robust from the Civil War until 1973, averaging 2% to 3%. There were three growth spurts during this time, followed by a lull until around 2004.
Between 1870 and 1900, average productivity increased by 2% a year. That was because of increased life expectancy that allowed workers to work longer. Technology, such as railroads, telegraphs, and the internal combustion engine, also helped workers produce more.
During the 1920s and 1930s, productivity increased by 2% to 3% annually. Innovations abounded in electricity generation, internal combustion engines, and telecommunications. There were new petrochemicals, including fertilizers for agriculture, plastics, and pharmaceuticals. In the 1920s, productivity gains in manufacturing averaged 5% a year.
Between 1940 and 1973, the growth spurt continued. Productivity gains were 1.5% to 2% a year as innovations spread throughout the country. Contrary to popular opinion, the World War II effort didn't improve productivity in anything other than medical care.
Productivity slowed until from 1995 through 2004. It finally increased between 1% and 1.5% due to the introduction and widespread adoption of information technology. It took a few years to ramp up productivity.
From 2007 to 2012, productivity averaged 1.8%, as workers who weren't laid off during the recession had to produce more. There has not been much headway since 2012—average labor productivity dropped to 1.1% for the period of 2013 to 2019.
Most of that productivity gain has been from the top 5% of companies. The most productive companies have benefited from technology that wasn't available to smaller firms. They can afford expensive robotic factories and use economies of scale offered by global markets. As a result, 95% of firms have seen little gains in productivity.
What This Means for Job Growth
Higher productivity no longer leads to more jobs, as it did until 2000. Job growth has been stagnant; however, the Bureau of Labor Statistics projects that employment will grow through 2029 by 6 million jobs, which reflects an annual rate of growth of 0.4%. While any amount of job growth is good, the stagnant trend in growth stems from a transition of jobs to new industries. Newer jobs are expected to focus on areas that will require secondary education, technical training, and technical skills.
The International Federation of Robotics estimates there are between 1.5 and 1.75 million industrial robots in operation. By 2025, it predicts as many as 6 million. Most are in the auto and electronics industries. Researchers from M.I.T. estimated that every robot costs 3.3 jobs.
Increased automation in factories and service industries is one of the culprits for the shift. Also, automation is replacing many jobs that used to require a person, such as secretaries, bank tellers, or bookkeepers. The fastest-growing jobs are now in sectors that require innovation, insights, and reasoning—traits that artificial intelligence and automation are not yet able to mimic. Expectations for the highest amount of job growth are in energy, health, and information security.
One of the reasons that the United States is losing its competitive edge is the fact that it has fallen considerably in terms of global educational ranking.
Outsourcing leads to a lower U.S. standard of living as wages equalize. In addition, the U.S. labor force has become less competitive, adding to pressures to accept lower wages.
U.S. companies are being forced to offer lower wages to U.S. employees if they are to compete against companies in countries with lower living standards. If U.S. companies can't find enough low-wage, skilled workers in the United States, they have to source these jobs overseas or go out of business.
Productivity and Income
This discrepancy in productivity has slowed the rising standard of living for most Americans. Companies not in the top 5% can't afford to pay their workers more. Salaries at tech behemoths like Google, Amazon, and Facebook have outpaced average wages.
The 2008 financial crisis aggravated this trend. While GDP has continued to increase, it didn't translate to an equal increase in workers' standard of living. Instead, it went to the owners of capital—shareholders and executives. Corporate profits reached an all-time high in 2012—11.8% of GDP, up from 5% in 2000.
- Productivity trends demonstrate the effectiveness of a country's workforce.
- Productivity increases don't always lead to job growth.
- An increase in productivity doesn't always lead to higher incomes.