Productivity Concepts

Meaning

The word “productivity” relates to the “output” (of goods and services produced) in relation to the quantity of resources or inputs used to produce them. Some examples of input are labor, materials, machinery, land and Building and energy. Productivity is basically concerned with how efficiently the output of goods and services is produced and the value created by the production process. In other words, if a product is made at the lowest possible cost with high quality and can be sold competitively on the market at a good price, then its productivity level is considered high.

The productivity concept is often expressed with this simple equation:

Productivity = Output/Input

As the equation shows, the objective of productivity is to maximize output and minimize input. Productivity can also be defined as the sum of efficiency and effectiveness. In other words, it can be stated as:

Productivity = Efficiency + Effectiveness

Definition of Productivity

Productivity has been generally defined as a ratio of a measure of output to a measure of some or all of the resources used to produce this output. Defined in this way, one or a number of input measures can be taken and compared with one or a number of output measures.

When attempts are made to include all inputs and all outputs in a system the measure is called a total productivity measure (TPM). The inputs used in a process can be hours of labor, units of capital, and quantities of raw materials compared with the consequent output.

A prolonged structural increase in productivity is the result of many factors, among which the following:

• capital accumulation through investments;
• the long-lasting process of diffusion of new technologies (often imported from abroad);
• domestic innovative efforts;
• Imitations of organizational and technological modes of production from world-class practises;
• enhanced division of work;
• the development of physical and social infrastructure;
• higher levels of education;
• a higher involvement and motivation of workers in the production processes.

In a broader perspective, an increase of productivity is due to a squeeze in waste of resources, to narrower limits of irrational processes of production and governance, to an effective link between market and social needs.

Impact on other variables

Higher productivity first impacts usually on profits; then, with lags and without automatic mechanisms, on wages.

If production costs do not overshoot that productivity increase, unit cost of production will be lower, opening the possibility of price fall or stability. In this vein, higher productivity is conducive to lower inflation.

International competitiveness will increase by the same chain of reasons.

If a firm dismisses workers after having invested in new machines, technological unemployment will take place.

If on the contrary the improved production can be sold at higher prices or produced with less wasted materials and energy, output value added can rise and one can obtain even an increase in employment.

Employment in machine-producer industries will rise in both situations.