Productivity

What Productivity Measures

Productivity: output per unit of input in a given time period.

Labour productivity: output per worker, or per hour worked, in a given period: \[ \text{Labour productivity} = \frac{\text{Output}}{\text{Workers}} \]

A bakery where 5 bakers make 2,000 loaves a day has labour productivity of 2,000 ÷ 5 = 400 loaves per baker per day. If a faster mixer lets the same 5 bakers make 2,500 loaves, productivity rises to 500.

Output per hour is fairer when staff work different hours, and it is the measure usually quoted for the UK economy.

Factors Influencing Productivity

The main influences are:

• Capital and technology: more and better machinery, software and equipment. A warehouse picker with a handheld scanner fills more orders an hour than one working from a paper list.
• Skills and training: trained staff work faster and make fewer mistakes, so less time goes on putting them right.
• Management and organisation: clear roles, good planning and the division of labour (unit 1.2.4) cut the time spent waiting or switching tasks. Lean production (unit 2.3.3) has the same aim.
• Motivation: staff who are fairly paid, secure and involved in decisions tend to work harder and stay longer, so less time is lost training replacements.

Productivity and Competitiveness

Competitiveness: a firm's ability to win sales from its rivals, on price or on quality.

Productivity matters because of unit labour cost, the labour cost of making one unit. A worker paid £12 an hour who makes 20 units an hour costs 60p a unit. If productivity rises to 30 units an hour at the same wage, the cost falls to 40p.

When productivity rises:

• The firm: more output per worker → lower unit labour cost → lower average cost → it can cut prices to win sales, or keep them and earn a wider margin.
• Exporters: lower unit costs → UK goods can be priced below overseas rivals' → more export sales.

A firm whose productivity falls behind its rivals' faces the reverse: higher unit costs, thinner margins and lost sales.

The gain in competitiveness depends on:

• Wages: if pay rises as fast as productivity, unit labour cost does not fall.
• Rivals' productivity: competitiveness is relative. A firm that improves by 2% a year still falls behind rivals improving by 5%.

Productivity and Wages

Higher productivity is what lets a firm pay more without raising its prices.

• Workers: each worker produces more → their work is worth more to the firm → it can raise pay and keep unit labour cost the same → higher real wages.
• Firms, when pay outruns productivity: wages rise faster than output per worker → unit labour cost rises → the firm raises prices or accepts lower profit, and may cut jobs.

The link also runs the other way: better pay can raise productivity, because motivated staff work harder and fewer leave.

Whether workers share in a productivity gain depends on:

• Bargaining power: when staff are hard to find, or a trade union is strong, workers can push for a share. Otherwise the firm may keep the gain as profit.
• Where the gain came from: if a machine now does work people used to do, output per worker rises but some jobs go.

Productivity and Economic Growth

Economic growth: an increase in real GDP, the value of an economy's output adjusted for inflation (unit 2.5.1).

An economy can produce more by putting more people to work, or by getting more from each worker. The workforce grows slowly, so lasting rises in output per person, and in living standards, depend on productivity.

Productivity rises across the economy → more output from the same workers → the economy's productive potential grows → higher real incomes, and more tax revenue for the government.

Before the 2008 financial crisis, UK output per hour grew by about 2% a year. In the decade after, it grew by just 0.3% a year. This slowdown is known as the UK productivity puzzle.

Labour-Intensive and Capital-Intensive Production

Labour-intensive production: production that uses a high proportion of labour compared with capital, so wages are a large share of costs.

Capital-intensive production: production that uses a high proportion of machinery and equipment compared with labour.

A workshop making hand-built furniture is labour intensive. A flat-pack furniture factory, where machines cut and drill the boards, is capital intensive.

Because its costs are mostly fixed, a capital-intensive firm has a higher break-even output than a labour-intensive one (unit 1.6.2).

Which method a firm chooses depends on:

• The cost of labour against capital: where wages are low, people are cheaper than machines. As wages rise, firms switch to machines, such as self-service tills.
• The scale of output: expensive machinery only pays for itself over a large, steady volume.
• The product: hairdressing and care work need people, and some customers pay more for hand-made goods.