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Why is Productivity Important? > Individuals

Why is productivity important to individuals?

Productivity affects wages image of red arrow pointing right Important to individuals as workers
Productivity affects prices image of red arrow pointing right Important to individuals as consumers

Productivity can affect wages

As productivity increases, wages can be raised without corresponding increases in producers’ unit labor costs. image of stack of money with chart trending up
image of a check Productivity data are used by corporations and labor groups to negotiate wages.

How does this work?

Suppose technological improvements to the soybean-growing industry result in greater crop yields. With the same inputs—the same labor, the same land, the same machinery—a greater number of soybeans can be grown and sold.

image of a soybean

Businesses in the soybean industry have choices:

They can continue using the same amount of inputs and grow and sell more soybeans.

Alternately, they can continue to grow and sell the same amount of soybeans, using less of the inputs.

Either way, the business can earn greater profits.

The profits may be distributed to the workers, in the form of higher wages; reinvested in the business, perhaps in the form of additional capital investment; distributed to the owners of the business, i.e., as dividends; or distributed to the consumers, in the form of lower soybean prices.

image of a soybeans for sale

Productivity can affect buying power

Increases in productivity offset the effect of hourly compensation increases on unit labor cost, a key component of price change.

By reducing unit labor cost increases, productivity growth reduces inflationary pressure on prices.

image of a credit card buying power

Hourly wages can rise faster than prices, increasing buying power for workers and consumers.