Significance
Physical productivity is the quantity of output produced by one unit of production input in a unit of time. For example, a certain equipment can produce 10 tons of output per hour.
Economic productivity is the value of output obtained with one unit of input. For example, if a worker produces in an hour an output of 2 units, whose price is 10$ each, then his productivity is 20$.
It is clear that both technological and market elements (as output quantities and prices) interact to determine economic productivity.
Average economic productivity is computed by dividing output value and (time/physical) units of input. If the production process uses only one factor (e.g. labour) this procedure gives the productivity of that factor, in this case labour productivity.
When more than one input is used, for each factor it is possible to compute by the same procedure its productivity, called in this case "partial".
"Total factor productivity" is the attempt to construct a productivity measure for an aggregation of factors. The meaningfulness of such an aggregation requires additional hypotheses, thus it is not assured in a general framework.
Determinants
Technology determines the maximal physical quantity of output that can be reached as well as the number and the quality of inputs required. Adopted technology is in turn an economic choice, taken upon both economic and technological reasons. The spectrum of concurrent technologies that can be chosen is influenced by available innovations and adopter's compatibilities. Reversibility of this choice is often low because of high switch costs.
Technological change is fast only in some industries, whereas in many others it is much more gradual. In any case, the diffusion of worse technology than that presently in use is a marginal and irrilevant phenomenon. Technology always improves. Physical productivity, too.
Economic productivity will depend also on pricing and demand. If consumers require less products than potentially producible, plants will not work at full productive capacity.
Thus economic productivity can well fall, as with decreasing demand and prices.
On an individual scale, physical productivity depends on the difficulty of the task, the skills of the worker and its learning curve (the number of times he already performed the task and how he was guided by good "teachers / masters"). For example, think at an unskilled buyer assembling an IKEA piece of furniture for the first time: he will be looking for avoiding mistakes more than optimising the time to work. If he purchased a second piece, he will be much more productive (i.e. will need less time to assembly it). After a few pieces his productivity will level off with no further large improvements.
"Higher productivity can be attained through adequate levels of earnings; higher job security; higher education and life-long training, including on-thejob training; good working conditions — a safe and healthy working environment, an appropriate balance between work intensity and job autonomy and greater employee participation and empowerment, including social dialogue; and better work-life and gender balance. These can strengthen human capital formation, including firm-specific human capital, and increase motivation, commitment and effort. They can reduce accidents, absenteeism and stress, induce creative effort, foster cooperation and generate positive externalities on co-workers" (EU Commission, 2015, p. 148 - Employment and Social Developments in Europe).
On a macroeconomic level, labour productivity, i.e. GDP per worker, depends on the corrisponding dynamics of the two aggregates (GDP and employment). Productivity will rise if GDP increases faster than employment.
A decoupling of labour market and macroeconomic policies can lead to higher employment without GDP growth, leading to a lower productivity.
A high degree of productive capacity utilization is conducive to high productivity of labour and capital.
A prolonged structural increase in productivity is the result of many factors, among which the following:
1. capital accumulation through investments;
2. the long-lasting process of diffusion of new technologies (often imported from abroad), which in turn can be accelerated by a pro-diffusion tax;
3. domestic innovative efforts;
4. imitations of organizational and technological modes of production from world-class practises;
5. enhanced division of work across the supply chain in the different stages of production and distribution, coupled with effective coordination mechanism, including by prices, contracts, formal and informal agreements, communication, trust, reputation, etc.;
6. the development of physical infrastructure, including efficient transport, energy, telecommunication networks;
7. a sound social infrastructure, including effective public institutions, NGOs, business and social networks, etc.
8. higher levels of education and competencies;
9. a higher involvement and motivation of workers in the production processes.
At firm level, firms' incentives increase workers productivity through a stimulating environment and the removal of obstacles to their effective work. In the private sector, short-term productivity can be achieved by systematic quality control, high pace of process, on-going optimisation of flows. However, more autonomy and creativity can enhance longer-term productivity, e.g. in terms of better products and higher consumer satisfaction.
In the public sector, weak productivity, in terms of lengthy and un-smooth elaboration of responses in bureaucratic routine documents (e.g. licences, permissions, subsidies,...) is the result of selection mechanisms of the labour force, restrictive interpretation of formal rules defending delays and discharge of responsibilities, wrong incentives to the organization hierarchy, high values of political informal networks (where belonging to a power chain is more relevant than competence and effort), an organizational culture based on reciprocal limitation of efforts, the negative reaction of colleagues to excellence.
In both cases, organization structure and organization mechanism are key to tranform individual skills, attitude and efforts into company-wide results. In best cases, groups of very normal people are able to achieve extraordinary results thanks to organization and leadership methods.
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. Firms can afford to pay them without losing market shares but it's on workers the effort to organize and get pay increases.
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.
The higher profits due to high productivity generate the cash flow, foster trustworthiness for loans and equity investors, as well as the reason for larger investments. If they entails economies of scale and are matched by a growing demand, and these dynamics take place in a sufficienty large share of the economy, an important supply-side based mechanism of GDP growth is put into motion.
International competitiveness will increase by the same chain of reasons, boosting exports by a combination of lower prices and better quality. This in turn should improve the trade balance, reducing the need for aid and providing currency to pay back the possible debt cumulated towards foreign entities.
If the increase of GDP is slower than the increase in productivity, a fall in employment will take place (as a matter of definition!).
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.
Higher productivity in the public sector reduces the time and improves the quality of response to society demands, possibly increasing the consensus politicians enjoy. Instead, much of political debate between lower taxes and higher welfare protection leads to reciprocal dissatisfaction because of the appaling low productivity of public services.
If due to high quality jobs and better work organization, high productivity can also contribute to fostering higher labour market participation and longer working lives, particularly of certain population groups (e.g. older workers, those with family responsibilities or disabilities), reducing dependency on social security systems and ensuring greater social cohesion.
Productivity has grown in the long run in almost all countries in the world. In rich countries, GDP soared mainly through productivity increase. Countries with a low productivity increase are among the poorest of the planet.
Wide productivity differentials in the world are the main explanation of dispersion of per-capita income.
Business cycle behaviour
Economic productivity usually shows a pro-cyclical behaviour, while at the same time it is necessary to distinguish smaller sub-phases and wider multiplicity of paths than in the case of other variables:
Just after high peaks, GDP slowing dynamics is not immediately matched by employment. Productivity per worker falls.
As far as recession takes momentum, firms begin to dismiss workers in attempt of reducing losses. This move should increase productivity again, but dismissed workers reduce their consumption and GDP contract further. The net effect on productivity depends on the speed and strength of the two factor.
When recovery begins, once again employment is lagging, with minor or no job increases ("jobless recovery"). Accordingly, there is a drastic improvement in productivity and productive capacity utilization. These developments positively impact on profits and on the willingness of firms to invest.
Depending on institutional incentives, firms can opt for an unbalanced mix of the following strategies:
1. to better exploit existent employment and massively use overhead, so that per-worker productivity rises dramatically, with higher wages for the few worker employed (if overheads are paid better than normal hours);
2. to enlarge employment proportionally to output, keeping productivity stable;
3. to invest in labour-saving machinery, with a lagged increase of productivity and, potentially, a negative impact on employment (which is even more likely if outsourcing to other countries is chosen).
Depending on the aggregated effect of these decentralized choices, productivity will more or less increase with GDP rise.
At peaks, productivity is much higher than in troughs.
