This article focuses on productivity. The relationship between inputs, outputs, and productivity levels is analyzed. This article provides an analysis of the main types of productivity measures, including average labor productivity and total factor productivity, and a discussion of how productivity is managed and promoted in organizations. The relationship between productivity and growth is explored. The main productivity measures, including productivity growth indexes, productivity level indexes, and subjective productivity measures, are described and the issues associated with productivity measurement are discussed.
Keywords Capital Deepening; Competitiveness; Current Population Survey; Economic Growth; Growth; Input; Labor Productivity; Labor Quality; Multifactor Productivity; Neoclassical Growth Theory; New Growth Theory; Output; Productivity; Productivity Growth Index; Productivity Level Index; Reliability; Single Factor Productivity; Subjective Productivity Measure; Total Factor Productivity; Validity
Productivity is a measurement of economic efficiency that analyzes whether economic inputs are being turned into outputs in an effective manner. Output refers to products or services and input comprises materials, labor, capital, and energy. Economic analysts study productivity as a means of understanding the current economy. In addition, economic analysts engage in productivity projections as a means of predicting the future health and strength of the economy in aggregate and by sectors. Productivity is the foundation of the economy. Productivity slows inflation and contributes to the financing of health, education, and social welfare programs (Schreyer, 2005). The future growth of productivity is linked to the evolution of technology and business investment patterns. Productivity drives economic growth. For example, the U.S. experienced technology-driven productivity growth in the 1990s (Jorgenson, 2006).
Organizational performance is linked to “effectiveness, efficiency, quality, productivity, quality of work life, innovations, and profitability” (Kemppila & Lonnqvist, 2003, p.1). Productivity is linked to inputs and outputs while profitability is linked to inputs, outputs, and price. Organizations measure productivity as a means of assessing organizational strength and planning for increased productivity. Organizations prefer to measure total productivity whenever possible. The total measure of productivity is the overall output divided by the totality of inputs. Challenges to effectively measuring total productivity arise when inputs and outputs overlap or evolve quickly (Kemppila & Lonnqvist, 2003). Industries with difficult productivity levels and outputs include banking, insurance, computer production, and communication services. These industries are characterized by quickly evolving technologies (Schreyer, 2005).
The following sections provide an overview of the main types of productivity measures, including average labor productivity and total factor productivity, and a discussion of how productivity is managed and promoted in organizations. These sections serve as the foundation for later discussion of the relationship between productivity and growth. The main productivity measures, including productivity growth indexes, productivity level indexes, and subjective productivity measures, are described and the issues associated with productivity measurement are discussed.
Types of Productivity
There are numerous categories of productivity including labor productivity, firm or organizational productivity, and individual or employee productivity. Knowing that human capital is formed by investments to build individual or organizational skills that drive productivity growth (Hazan, Marston, & Rajah, 2013), economists tend to focus on measures and projections of labor productivity. Labor productivity refers to the ratio of output to inputs. Labor productivity reflects the efficiency with which labor is used in production rather than the effort per worker. Economists study the average labor productivity (ALP), which refers to the ratio of output to hours worked. The growth of average labor productivity has three sources: capital deepening, labor quality, and total factor productivity (TFP) growth.
- Capital deepening refers to the increase in capital services per hour worked.
- Labor quality refers to labor input per hour worked.
- Total factor productivity growth reflects the labor productivity growth not attributable to capital deepening or labor quality gains (Jorgenson, 2006).
Economists focus on labor productivity rather than more complex measures of complexity in large part due to the relative ease of gathering and computing labor productivity data (Diewert & Nakamora, 2005). Labor productivity is an important economic indicator because the health and demographics of a nation's labor force affect the nation's productivity and potential for economic growth. National economies rely on steady, and in most instances, growing labor supply and demand. Economic growth is often created by increased productivity from a larger labor supply. Individual and aggregate labor supply is determined by individual and aggregate appetite for leisure and consumption as well as wage rates. The public sector can manipulate wage rates and institute labor policies, controlling work related issues such as child labor and work visas, to raise or lower the labor supply. Labor supply policies are often developed to address the public problem of intractable poverty. Labor supply policies, such as welfare reform, job training, and the Earned Income Tax Credit (EITC), are developed to increase the labor supply, job skills, or wages of the poor (Bartik, 2001).
Productivity is one of the main factors influencing the success of organizations. Productivity influences economic growth and living standards. Increases in productivity levels and outputs strengthen profits and the economy in general. As a result of the importance of productivity levels to the public and private sectors, organizations actively manage their productivity. Productivity is managed in large part through ongoing quantitative productivity measurement. Organizational productivity is influenced by the following factors and variables: work habits, work climate, personnel feelings and attitudes, new skills, advancement, initiative, and physical work environment.
- Work habit considerations include absenteeism, tardiness, and safety rule violations.
- Work climate includes the number of grievances, employee turnover, and job satisfaction.
- Personnel feelings or attitudes include attitude changes, favorable reactions, and perceived changes in performance.
- New skills include decisions made, conflicts avoided, listening skills, reading speed, frequency of use of new skills.
- Advancement includes increases in job effectiveness, number or promotions and pay increases, and request for transfer.
- Initiative includes number of suggestion submitted implemented, and successful completion of projects.
- Physical work environment includes order and tidiness, ergonomics, walkways, noise, and lighting (Kemppila & Lonnqvist, 2003).
Productivity is managed and promoted in numerous ways in different firms, sectors, and industries. For example, in the private employee benefit plans sector, benefit plan administrators and managers promote productivity by educating their personnel about the cost of employee benefits. The International Foundation of Employee Benefit Plans, which encourages employers to engage in employee benefit plan education, believes that employee appreciation of and knowledge about benefits contributes to workplace productivity. To fully appreciate the employee benefits that they receive, employees must become familiar with their value. Similarly, an employer can provide the optimal level of pay mix and benefits to improve employee engagement (Davidson, 2013). Employers spend significant financial and human capital resources on benefit plan coverage and administration. For example, in 2003, private sector employee benefit costs averaged 42.3% of payroll. The employee benefit costs for small companies averaged 31.9% of payroll. The employee benefit costs averaged 44.9% for large companies. Few employees realize that, in 2003, employees received approximately $18,000 of employee benefits over and above their earned wages. Health care benefits generally make up approximately 35% of total employee benefit costs. Employers, in 2003, spent an average of $6,277 per employee on health care related benefits. Ultimately, employees who understand the true costs and expenses associated with employer-sponsored benefits plan may appreciate the financial commitment made by their employers and be more productive employees (Feldstein, 2005).
Economists, businesses, and governments recognize that productivity can be promoted and facilitated through technical change and increased trade. Technical change increases economic growth and productivity. As a result, businesses and governments actively promote technical change at the corporate and industry levels. Governments actively diffuse new technologies into society and industry in an effort to increase productivity in their nations and increase their level...
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