Why Is Productivity Important in Economics?

Productivity is a measure of efficiency. It measures how well a person completes a task or how well participants in the economy change inputs to outputs. For instance, it measures how efficiently people execute a task using their physical labor or how well a business can use its resources to move products from the production line to the market.

The level of productivity is the most fundamental factor that determines the standard of living. Raising it allows people to get what they want faster or more in the same amount of time. Supply rises with productivity, which decreases real prices and increases real wages.

Productivity in Economics

As noted above, productivity measures the efficiency of participants in the economy. It determines how well people and businesses use inputs to convert them into outputs. Productivity comes in many forms, including:

• Workplace Productivity: This is the total productivity of every individual in the workplace. This includes regular employees, managers, corporate executives, and other laborers.
• Industry Productivity: Also called sector productivity, this category refers to all companies that operate in a specific industry and how well they produce goods and services.
• Global Productivity: This type of productivity amasses every industry or sector within an economy and how efficiently they work as a whole.

Physical productivity is defined as the quantity of output produced by one unit of input within a single unit of time. The standard calculation gives us output per unit of time, such as five tons per hour of labor.

An increase in physical productivity causes a corresponding increase in the value of labor, which raises wages. That is why employers look for education and on-the-job training. Knowledge and experience increase the human capital of the workers and make them more productive.

Productivity's Impact on Wages

Productivity can affect employee wages. That's because it can take less time to complete a task as productivity increases. For instance, replacing human labor with production equipment in the manufacturing process can cut down the production time while increasing output.

Here's an example to show how productivity relates to wages. Let's say someone offers you $45 to dig a hole in their backyard. Suppose that you have insufficient capital goods to do the job, such as your bare hands or a spoon. Using these tools, it might take you nine hours to dig the hole. Your labor is worth just $5 per hour in that case.

But, if you had a shovel, it might take you only three hours to dig the hole. The market value of your labor output just rose to $15 per hour. With a big enough excavator, you might be able to dig it in 15 minutes and make $180 per hour. In a perfectly competitive market, labor earns its marginal product.

Productivity and Technology

New machines, technologies, and techniques are crucial factors in determining productivity. Consider the U.S. economy in 1790. At that time, nearly 90% of the working population were farmers. By 2000, only 1.9% of the population was employed in farming. On a percentage basis, agriculture consumed about 60 times as much labor in 1790.

However, agricultural output is significantly higher today than in the 18th century. That makes food prices much lower today in real terms. It also frees up workers for other tasks. That is the way economic growth takes place when technology raises the productive capabilities of the people.

Productivity's Relationship With Consumption

Growth in productive capital requires periods of underconsumption. Producers must devote less energy toward making consumable goods so they can build and use new capital goods.

For instance, an office worker cannot create web content while setting up a new computer. These periods of underconsumption need to be funded, which is why businesses need investment for new capital projects.

Consumers must ultimately delay their satisfaction to supply funding for companies in exchange for more consumption in the future. That is how capital investment leads to higher productivity and future economic growth.

The Bottom Line

Productivity helps us measure efficiency at various levels. It's an important economic metric for corporations and individuals. It can tell businesses whether they're manufacturing their products and services efficiently or how well individuals work to reach their goals. There are several ways to increase productivity. Entities can increase their efficiency or increase the inputs that are turned into outputs.