Productivity measures 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.
Definition and Examples of Productivity
When measuring a country's productivity, its output is compared to its input. High productivity occurs when lower labor and material costs are used to produce the same amount or more. When less labor is used to produce more, it promotes greater profit and gives a country an advantage in the global economy.
Gross domestic product (GDP) is the most common productivity measurement used by government agencies and economists. For example, the Bureau of Economic Analysis (BEA) publishes GDP data quarterly and explains economic circumstances that have led to any changes.
How Does Productivity Work?
Productivity is a performance measurement. Several metrics can be used to gauge productivity, but for a country, the most accepted and used method is its gross domestic product. Economists can also measure productivity per worker and labor productivity.
The Organisation for Economic Co-operation and Development (OECD) argues that there is no purpose for, or single measurement of, productivity, so there is still debate on whether a country's productivity can be measured or whether a measurement is useful.
Gross Domestic Product
Gross domestic product measures the market value of a country's goods and services produced. The Bureau of Economic Analysis is the primary government agency in the U.S. that analyzes data to publish this information. It uses data from other agencies such as the U.S. Census Bureau, the Bureau of Labor Statistics, and the U.S. Treasury.
The BEA uses four categories to measure GDP:
- Personal consumption: Goods and services consumed in the U.S.
- Private investment: Money that domestic businesses have invested within the U.S.
- Net exports: The number of goods and services exported, minus the amount imported.
- Government spending: Spending on public services, such as defense and education, or infrastructure.
Central banks analyze productivity to see whether the economy is performing at its potential, sometimes called "production capacity."
If productivity is lower than capacity, then the economy is slowing. If productivity is too much higher than production capacity, the inflation rate could increase too much. For these reasons, slow productivity growth is desired, because it helps maintain a healthy rate of inflation and employment.
GDP Per Worker
GDP per worker is a measurement of one worker's contribution to GDP, which assists in measuring input. The number of workers in a country or the total number of hours worked can both represent the total input of a nation. To compute the GDP per worker, economists divide GDP by the number of workers in the workforce. A higher number can indicate an efficient workforce based on higher GDP or lower worker numbers.
Another frequently used ratio measures labor productivity in a country by using total hours worked. Gross domestic product is divided by the labor force's total hours, which gives GDP per hour—a measurement that shows hourly productivity. 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.
History of U.S. Productivity
Productivity growth in the U.S. was robust from the Civil War until 1973, averaging 2% to 3%. There were three growth spurts during that time, followed by slow growth until around 2004.
Between 1870 and 1900, average productivity in the United States increased by around 2% per 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 were boosted by manufacturing.
Between 1940 and 1973, the growth spurt continued. Productivity gains were 2% to 2.5% per 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.
Over 28 years, from 1974 to 2006, the U.S. experienced productivity growth measured by GDP every year. From 2007 to 2012, productivity growth averaged 1.0%. There have been improvements since 2012, but average labor productivity only rose by 1.2% from 2013 to 2021.
Most of that productivity gain has been from the top 5% of companies. The most productive companies have benefited from technology that has been unavailable 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 gain in productivity.
What It Means for Most Americans
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 2030 by 11.9 million jobs, reflecting an annual growth rate of 0.7%. 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.
Productivity and Income
This discrepancy in productivity has slowed the rising standard of living for most Americans. Companies not in the top 5% often can't afford to pay their workers more. Salaries at tech behemoths like Alphabet, Amazon, and Meta (formerly Facebook) have outpaced average compensation.
The 2008 financial crisis aggravated this trend. While GDP has continued to increase, it hasn't translated to an equal increase in workers' standard of living. Instead, it has gone 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.