Productivity is recognized as a measure of economic efficiency which reports how effectively economic resource inputs are converted into resource output. When all outputs and inputs are included in the productivity measure it is called total productivity. Outputs and inputs are defined in the total productivity measure as their economic values. Productivity measures may be examined collectively (across the whole economy) or viewed industry by industry and/or individual organization, including public sector and business – private sector, to examine trends in labor growth, wage levels and technological improvement.
Business productivity is the capability of an organization to apply available resources to produce profitable goods or services as required by customers. It is the productivity that measures the performance of an organization, and it can also be used for businesses themselves to assess their own progress.
Enhanced production lowers the cost per unit of a product which in turn, results in lower prices for better quality, which enhances a business’ market competitiveness. Productivity management is a priority focus of well-managed businesses. Best-in-class companies largely deploy formal programs for continuously monitoring and improving productivity, such as production assurance and quality programs etc. Whether they have a structured productivity activity or not, organizations, should be regularly evaluating technologies, tools, methods, and techniques to improve quality, reduce downtime and inputs of labor, materials, energy and purchased services.
Generally modest changes to operating methods and/or processes will increase productivity, but the greatest gains typically result from digital transformation and adopting new technologies, which may require capital expenditures, for purchase of equipment, computers or software. Employees may be meeting productivity goals, however, from an organizational perspective their productivity may be zero or effectively negative if they are dedicated to redundant or legacy value-destroying activities.
Successful organizations are typically those that prioritize productivity compared to just focusing on strategies to manage revenues and profits. Conversely, businesses that lack strategic attention to productivity usually pay a price in terms of decreased production and a higher production cost, resulting in reduced sales and lower profitability. Thus, a high productivity level can be considered a measure of success or failure!
A selection of the key productivity lexicon, as supported by the US Bureau of Labor Statistics – BLS includes:
Why is productivity measurement important?
Advances in productivity, that is the ability to produce more with the same or less input, are a significant source of increased potential national income. The U.S. economy has been able to produce more goods and services over time, not by requiring a proportional increase of labor time, but by making production more efficient.
What are the benefits of productivity growth?
Productivity growth is a crucial source of growth in living standards. Productivity growth means more value is added in production and this means more income is available to be distributed. At a business or industry level, the benefits of productivity growth can be distributed to:
- Workforce through better wages and conditions;
- Shareholders and superannuation funds through increased profits and dividend distributions;
- Customers through lower prices;
- Environment through more stringent environmental protection; and
- Governments through increases in tax payments (which can be used to fund social and environmental programs).
Productivity growth is important to the firm because it means that it can meet its (perhaps growing) obligations to workers, shareholders, and governments (taxes and regulation), and remain competitive or even improve its competitiveness in the market place. Adding more inputs will not increase the income earned per unit of input (unless there are increasing returns to scale). In fact, it is likely to mean lower average wages and lower rates of profit. But, when there is productivity growth, even the existing commitment of resources generates more output and income. Income generated per unit of input increases. Additional resources are also attracted into production and can be profitably employed.
How is productivity measured by BLS?
Productivity is measured by comparing the amount of goods and services produced with the inputs which were used in production. Labor productivity is the ratio of the output of goods and services to the labor hours devoted to the production of that output.
What is the most commonly used productivity measure?
Output per hour of all persons—labor productivity—is the most commonly used productivity measure. Labor is an easily-identified input to virtually every production process. In the U.S. nonfarm business sector, labor cost represents more than sixty percent of the value of output produced. Output per hour in the nonfarm business sector is the productivity statistic most often cited by the press.
What are “unit labor costs”?
Unit labor costs are calculated by dividing total labor compensation by real output or—equivalently—by dividing hourly compensation by productivity.
That is, unit labor costs = total labor compensation / real output, or equivalently, unit labor cost = hourly compensation / productivity= [total labor compensation / hours] / [output / hours]
Thus, increases in productivity lower unit labor costs while increases in hourly compensation raise them. If both series move equally, unit labor costs will be unchanged.
Does outsourcing and offshoring of intermediate production inflate the productivity measures?
Within the U.S. business sector, outsourcing of production or services from manufacturing industries to other domestic industries alters the distribution of production among firms. Since firms can differ in their productivity, domestic outsourcing can affect business sector productivity if the contracting firm differs in its productivity from the original firm. Similarly, outsourcing from U.S. manufacturers to businesses located abroad (or offshoring) can affect business sector productivity if the productivity of the production lost to offshoring differs from the productivity of remaining and any new U.S. business sector production. Any effect of outsourcing or offshoring on business sector productivity change is expected to be modest.
Outsourcing and offshoring have the potential for greater effect on labor productivity measures for the manufacturing sector. BLS measures output for the manufacturing sector using the sectoral output concept: gross output less sales between establishments within the manufacturing sector. Unlike the value-added measure for the business sector, this output measure includes the value of intermediate inputs purchased from outside the manufacturing sector, whether purchased from domestic or foreign suppliers.
As manufacturing firms outsource or offshore production of intermediate inputs the value of manufacturing output is unchanged, but the shift to U.S. non-manufacturing or to imported intermediate inputs is accompanied by a reduction in labor hours and therefore an increase in the measure of labor productivity. It is estimated that the growth in imported intermediate inputs contributed 23 percent (0.92 percentage points) of the 3.96 percent average annual growth in labor productivity in the manufacturing sector from 1997-2006.
How are labor hours calculated?
The primary source of hours and employment data is the BLS Current Employment Statistics (CES) program, which provides data on total employment and average weekly hours of production and nonsupervisory workers in nonagricultural establishments.
For the quarterly productivity measures, information from the National Compensation Survey (NCS) is used to convert the CES hours to hours at work by excluding all forms of paid leave. Average weekly hours for nonproduction and supervisory workers are estimated by using data from the Current Population Survey (CPS), the NCS and the CES. Because CES data include only nonagricultural wage and salary workers, data from the CPS are used for farm employment as well as for nonfarm proprietors and unpaid family workers. Government enterprise hours are developed from the National Income and Product Account estimates of employment combined with CPS data on average weekly hours.
What is included in compensation?
Compensation is a measure of the cost to the employer of securing the services of labor. It includes wages and salaries, supplements (like shift differentials, all kinds of paid leave, bonus and incentive payments, and employee discounts), and employer contributions to employee-benefit plans (like medical and life insurance, workmen’s compensation, and unemployment insurance).
The measures of compensation published with the major sector productivity measures and most of the nonmanufacturing industry labor productivity measures include an imputation of the earnings of the self-employed. This is because the output of proprietorships is included in the output measures for these sectors and industries.
Is output in your output per hour measure for the business sector equal to Gross Domestic Product (GDP)?
Business sector output is based on GDP but includes only a subset of the goods and services included in GDP. The business sector comprises about 75 percent of GDP since it must exclude those portions of the economy for which productivity measures cannot be constructed. General government, the output of the employees of nonprofit institutions and private households, and the rental value of owner-occupied real estate are excluded.
Why don’t we measure productivity for groups, such as white-collar workers?
BLS productivity measures are based on aggregate national measures of outputs and inputs. These data sources do not provide the information BLS would need to construct occupational measures. There are also conceptual obstacles to disaggregating these national measures. For example, the output of a factory may require both white-collar and blue-collar inputs, and it is therefore unclear how to allocate the output to the two groups separately.
When data are provided quarterly, is the percent change for the year equal to the average of the percent changes for the four quarters?
The percent change for the year should closely approximate the average of that year’s four quarterly percent changes from the corresponding quarter of the preceding year. Because the percent change values presented in the official data are rounded to one decimal point, and because of minor variations in the year-to-year values used for seasonal adjustment of the quarterly data, results of a calculation based on press release data will reflect a small difference between the percent change for the year and the average of the quarterly percent changes from the preceding quarter a year ago.
The percent change for the year is NOT equal to the average of that year’s four quarterly percent changes from the previous quarter of the same year. The quarterly percent changes calculated from the previous quarter of the same year do not capture information on the year-to-year movement of the index number.