Understanding Productivity's Impact

Understanding Productivity's Impact

You know, productivity directly affects corporate profits and shareholder returns, and it all comes down to how individuals or organizations maximize their output. Let me break this down for you.

What Is Productivity?

Productivity compares the level of input with the output. The input could be labor, equipment, or money, and the output is typically a good or service. In economic terms, productivity is calculated as a ratio of gross domestic product (GDP) to hours worked. I look at labor productivity by sector to spot trends in job growth, wages, and technological advances. For a company, you can see productivity in the number of units produced relative to labor hours or by measuring net sales relative to those hours.

In simple terms, productivity measures how efficiently resources are used to create value.

Maximizing Productivity

Economists view productivity as the key source of economic growth and competitiveness, whether you're looking at a business, an industry, or an entire nation. A country's ability to improve its standard of living depends on raising its output per worker, which might involve better equipment, improved production processes, or a better work environment.

We use productivity growth to model the productive capacity of economies and determine capacity utilization rates. This helps forecast business cycles and predict future GDP growth. Production capacity and utilization also assess demand and inflationary pressures.

Important Note on AI and Productivity

According to a Federal Reserve survey, 33.5% of workers using generative artificial intelligence (AI) every workday in 2024 reported saving four hours or more of labor input time.

Measuring Productivity

Let me explain the main ways to measure productivity. Labor productivity, published by the Bureau of Labor Statistics, is the ratio of GDP to total hours worked in the economy. Growth in this area comes from more capital per worker, better education and experience in the workforce, and technological improvements.

Total factor productivity considers investments in plant and equipment, innovation, supply chain improvements, education, enterprise, and competition. It's also known as the Solow residual or multi-factor productivity, comparing goods and services produced to combined inputs like labor, capital, energy, materials, and services.

Capital productivity measures how efficiently physical capital—things like office equipment, materials, supplies, and transportation—is used to create goods or services. You calculate it by subtracting liabilities from physical capital and dividing sales by the difference. A higher number means efficient use.

Material productivity looks at output compared to materials consumed, such as heat, fuel, or chemicals. It analyzes output per unit of material used.

Productivity and Investment

When productivity doesn't grow much, it limits wages, corporate profits, and living standards. Investment in an economy ties to savings, since investments come from savings. Low savings rates can mean lower investment and slower growth in labor productivity and real wages. In the U.S., low savings might harm productivity growth.

Policies like quantitative easing and zero interest rate policies encourage consumption over saving and investment. During lax monetary policy, credit is cheap, so consumers take on debt and save less for big purchases like mortgages. It's only when policy tightens and rates rise that saving—and future investment—is encouraged. Companies might opt for short-term investments or share buybacks instead of long-term capital. Sometimes, economists push for corporate tax reform to boost investment in manufacturing, infrastructure, or long-term assets.

Example of Productivity Calculation

The calculation is straightforward: divide a company's outputs by the inputs used. Often, input is labor hours, and output is units produced or sales. If a factory made 10,000 widgets last month with 5,000 labor hours billed, productivity is two widgets per hour (10,000 / 5,000).

Using sales: if those widgets equal $1 million, divide by 5,000 hours for $200 in sales per labor hour.

Take Toyota as an example. Their Toyota Production System (TPS) relies on constant learning and improvement, standardizing for quality, and eliminating waste.

What Is Productivity in the Workplace?

In the workplace, productivity is simply how much work gets done in a specific period. Depending on the company, output might be customers acquired or sales closed.

Is Productivity a Good Indicator of an Economy's Health?

Productivity isn't always a reliable indicator of economic health at a given time. For instance, during the 2009 U.S. recession, output and hours worked fell, but productivity grew because hours dropped faster than output.

What Factors Affect Productivity in the Workplace?

Factors include compensation, work environment, training, career development, wellness, diversity, increased responsibility, and management quality.

The Bottom Line

Productivity is simple: at a given input level, you get a certain output. More productive societies and processes yield more output from the same input. Whether from an economic, company, or personal view, measuring and tracking productivity is key to long-term success.