Productivity Primer
Measures of productivity
Productivity = Outputs / Inputs which also means
Productivity growth = Output growth less Input growth
Productivity can be expressed as a physical measure (for example, number of cars produced per employee), a monetary measure (for example, thousands of dollars of output per hour worked), or an index (for example, output per unit of labour = 100 in 1997-98).
In principle, inputs can be broadly defined to cover people's time, their skills, land, raw materials, machinery and equipment, energy (for example, electricity) and so on. But, most commonly, inputs are defined in terms of:
- labour (number of employees or hours of work) and
- capital (buildings, machinery and equipment, etc).
Labour productivity
Labour productivity is the ratio of (the real value of) output to the input of labour. Where possible, hours worked, rather than the numbers of employees, is used as the measure of labour input. With an increase in part-time employment, hours worked provides the more accurate measure of labour input.
Labour productivity should be interpreted very carefully if used as a measure of efficiency. In particular, it reflects more than just the efficiency or productivity of workers. Labour productivity is the ratio of output to labour input; and output is influenced by many factors that are outside of workers' influence - including the nature and amount of capital equipment that is available, the introduction of new technologies, management practices and so on.
Multifactor productivity
Multifactor productivity is the ratio of (the real value of ) output to the combined input of labour and capital. Sometimes this measure is referred to as total factor productivity.
In principle, multifactor productivity is a better indicator of efficiency. It measures how efficiently and effectively the main factors of production - labour and capital - combine to generate output. However, in some circumstances, robust measures of capital input can be hard to find.
Labour productivity and multifactor productivity both increase over the long term. Usually, the growth in labour productivity exceeds the growth in multifactor productivity (reflecting the influence of relatively rapid growth of capital on labour productivity).