Productivity Growth

Updated on February 23, 2024
Article byKhalid Ahmed
Edited byRaisa Ali
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Productivity Growth?

Productivity growth refers to the enhancement of outputs produced for a given level of inputs within a defined interval. It is the most important factor influencing long-term economic expansion and a significant rise in the standards of living for everyone.

Productivity Growth

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It aims to be the primary reason for driving long-term economic growth while improving the living standards of the people of a nation. The regulatory environment, institutions, and government policies impact productivity growth. They contribute to increasing productivity, allowing society to produce more services and goods using limited resources. It also increases people’s incomes, giving them more access to services and goods while providing extra leisure time.

Key Takeaways

  • Productivity growth describes the primary driver of both long-term economic growth and notable increases in the living standards of everybody while boosting a country’s long-term economic growth.
  • It has a formula where the output is divided by the input.
  • It is crucial for competitiveness, economic growth, and societal welfare. It leads to higher profits, lower prices, and increased demand for goods and services.
  • It has numerous sources like technological advancements, innovation, management practices, changes in demand, and factor-utilization.

Productivity Growth In Economy Explained

Productivity growth in economics is the increase in output per unit of input like capital labor or any other resources across time. It acts as a tool to measure a manufacturing plant’s efficiency in the production process. The metric can be determined by dividing the number of units produced by the number of staff hours used. It can be achieved by increasing the increase in output every hour per labor hour input.

It has three sources of growth- enhancement of workers’ quality (human capital), increase in the degree of capital, and technological growth (technological progress).

  • Human Capital: Individual workers’ abilities and efficiency are improved, making them produce more services and goods per hour. It increases labor productivity or labor productivity growth rate. It can be achieved through job training, gaining work experience, and adding education qualifications.
  • Physical Capital: It means an increase in the availability of factories and machines to laborers. Hence, aiding in growth in productivity. It depends on a higher level of investment that impacts the growth in the physical capital of an economy.
  • Technological Progress: It forms the toughest element to quantify in measuring as a source of growth in productivity. Moreover, research and development form an integral part of the drivers of technological progress.

Sources

Given below are the important sources of growth in productivity:

  • Technological advancements: Newer technologies enable highly efficient production processes and efficiency.
  • Innovation: Implementing and developing new ideas, services, and products drives productivity.
  • Improvements in management practices: Enhanced decision-making, organizational setup and resource allocation increase performance and productivity.
  • Changes in demand: Any increase in demand affects innovation and investment into productivity-increasing measures leading to higher productivity.
  • Changes in factor utilization: Making out most of the existing resources, capital, and labor also helps in improved productivity and affects total factor productivity growth.

Formula

Its formula is quite simple and depicted as follows:

Productivity growth= ((Current Productivity-Previous Productivity)/Previous Productivity)*100

Where current productivity represents the current level of productivity

previous productivity and represents the productivity level at a previous point in time

Examples

Let us use a few examples to understand the topic.

Examples #1

Suppose the labor productivity in a factory was 30 units per hour in 2022. It was increased to 35 units per hour in 2023. What was the productivity growth from 2022 to 2023?

Here, the current productivity is 35 units per hour, and the previous productivity is 30 units per hour. Hence, applying these values to the formula gives:

= ((35-30)/30)*100

= 16.67%

Hence, the productivity growth from 2022 to 2023 is 16.67%

Examples #2

Slovenia is one of the top entities among the leading 20 nations in terms of productivity growth for 2023. Furthermore, this signifies the fact that the country boasts a notably elevated level of labor productivity, coupled with a competitive business environment that facilitates effective competition among companies. Additionally, Slovenia’s labor force participation rate has been in a good uptrend.

Importance

The following points explain the importance of productivity growth:

  • Productivity growth forms the cornerstone of competitiveness of businesses and economic growth of nations leasing to raised standards of living.
  • The growth leads to higher profits for companies resulting in reinvestment or shareholders payment.
  • The growth leads to lower prices and increased services and goods demand due to higher wages.
  • Plays a key role in improving living standards and society’s complete welfare.
  • It promotes more innovation technological research, and advancements in the production of goods and services for improved quality of goods and services.
  • Productivity growth has positive and negative impacts on employment. Moreover, in the initial phase, the number of jobs may decrease, but new employment avenues and opportunities in another sector may develop with time.

Frequently Asked Questions (FAQs)

1. What are the potential reasons behind the decline in productivity growth?

According to economic experts, a decline in productivity growth can be due to many factors, like a hike in adjustment costs, weak capital formation, and lack of investment in manufacturing.

2. What drives productivity growth?

It is driven by elements like individual manufacturing plants becoming highly efficient and productive, a great degree of technological advancement, more skilled human capital, greater natural resources, and additional physical capital.

3. What determines the productivity growth rates of a country?

Multiple factors like human capital, natural resources availability, application of technological knowledge, and physical capital determine a country’s productivity growth rate. Specifically, all these factors work together in harmony to holistically shape the efficiency and output of a nation’s economy.

4. What is total factor productivity growth?

Total factor productivity growth can be stated as the increase in the level of output by a plant, which cannot be fully explained by variation in input amount. However, it emphasizes that enhanced input utilization and technological advancements drive the overall efficacy improvement of a plant.

This article has been a guide to what is Productivity Growth. Here, we explain the topic in detail, including its formula, examples, sources, and importance. You may also find some useful articles here –

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