What is Productivity? > Why does productivity change?

Why does productivity change?

Productivity increases when:

  • more output is produced without increasing the input
  • the same output is produced with less input

Productivity decreases when:

  • less output is produced without decreasing the input
  • the same output is produced with more input

Productivity is not the same as production or output.

Productivity can increase or decrease when output increases.

For example, working more hours increases total output, not necessarily output per hour.

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Example: Industry A

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For Industry A, more output was produced with decreasing hours worked, causing labor productivity to rise.

Output, hours worked, and labor productivity: Industry A
Year Output Hours worked Labor productivity

Year 1

100 100 100

Year 2

110 90 122

Year 3

120 80 150

Year 4

130 70 186

Year 5

140 60 233
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Example: Industry B

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For industry B, less output was produced, but with a larger decrease in hours worked, causing labor productivity to rise.

Output, hours worked, and labor productivity: Industry B
Year Output Hours worked Labor productivity

Year 1

100 100 100

Year 2

90 85 106

Year 3

80 60 133

Year 4

70 45 156

Year 5

60 30 200
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Example: Industry C

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Even with rising output, productivity may decrease, as illustrated by trends in Industry C. Both output and hours worked increased, but hours worked increased more relative to output. Therefore, labor productivity fell.


Output, hours worked, and labor productivity: Industry C
Year Output Hours worked Labor productivity

Year 1

100 100 100

Year 2

110 120 92

Year 3

120 140 86

Year 4

130 160 81

Year 5

140 180 78
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What affects labor productivity?

A change in labor productivity reflects the change in output that is not explained by the change in hours worked.

Output per hour can increase over time due to:

  • Technological advances
  • Improved worker skills
  • Improved management practices
  • Economies of scale in production
  • Increases in the amount of non-labor inputs used

What affects multifactor productivity?

A change in multifactor productivity reflects the change in output that is not explained by the change in measured inputs.

Many of the same factors that affect labor productivity affect multifactor productivity, but NOT increases in other measured inputs, such as capital.

Example

A farmer buys a new tractor and can cultivate 400 acres of land rather than 200 acres if he works the same number of hours. Measured labor productivity will double, although this increase is due to using the new tractor. Labor productivity measures only compare output to labor hours.

In a multifactor productivity measure, the new tractor is included in the combined input index. Multifactor productivity will not double because measured inputs have also increased. MFP may still rise if output increases more than combined inputs.