What is productivity?
Productivity is an economy’s ability to produce goods and services (outputs) using capital inputs (such as machinery, computer software, and land) and labour inputs. High productivity means that a large amount of output is produced with little input.
Productivity is the ratio of the volume of output to the volume of inputs. It measures how much output is generated per unit of input, that is:
Growth in productivity can come from either:
- increasing output, while maintaining the same level of inputs
- maintaining output while reducing the level of inputs, or
- a combination of the above.
Productivity reflects a range of concepts, such as:
- efficiency (getting more from what we already have)
- technological change
- measurement error in either the inputs or outputs.
What is productivity not?
To interpret productivity figures correctly, it is important to remember what it is not.
- Productivity is not just about efficiency, it represents other concepts such as technological change and measurement error.
- It is not a measure of value for money. This concept reflects cost per output, while productivity examines input to output (ie productivity measures volume changes with price effects removed).
- It is also not a measure of effectiveness. Productivity reflects how much extra output is produced per unit of input, not whether that input has an effective outcome.
- Productivity is not the same as production. Productivity growth may occur even when output (production) remains the same.
- It is also not a measure of competitiveness or profitability.
- Finally, productivity is not a complete performance management tool. There are other indicators that can evaluate performance.
Why does productivity matter?
Productivity measures help determine a nation’s economic performance and the well-being of its citizens. In economic theory, productivity increases should be matched by wage increases. This means that productivity growth helps boost the incomes of New Zealanders. Productivity growth is a key determinant of gross domestic product (GDP) – the main indicator of economic activity. As productivity leads to an increase in wages, it also enables the government to collect more income tax revenue. Therefore, productivity helps government to function. The ageing of New Zealand’s population means that boosting productivity will help maintain the growth in living standards over the long term. The second key determinant of GDP is the average amount of hours worked per person across the whole population each year. This figure is estimated to decline as the population ages (because a larger proportion of New Zealanders will move into retirement), meaning productivity growth is crucial.
Why measure productivity?
Productivity measures will help people understand the long-term improvements needed in New Zealand's living standards, economic performance, and international competitiveness. Productivity statistics let government, researchers, and media know how the economy is performing.
The key objectives of productivity measurement include:
- providing an indicator of living standards (assuming that productivity increases are matched by wage increases)
- tracing the effect of technological change
- assessing the economy’s underlying productive capacity
- enabling international comparisons of productivity
- enabling assessment of policies, programmes, or economic events over time.
What are the measures of productivity?
Productivity is measured by comparing the amount of goods and services produced with the inputs that were used in production. Statistics NZ produces three measures of productivity growth: labour, capital, and multifactor productivity.
- Labour productivity growth reflects the change in the amount of output per hour paid.
- Capital productivity growth shows how a change in the volume of assets, such as buildings, machinery, computers and IT, and land, affect output growth.
- Multifactor productivity growth refers to the contribution of changing management processes and technology towards output growth. It represents the growth in output that cannot be attributed to either labour or capital input.
What is the most commonly used productivity measure?
Labour productivity is the most commonly used productivity measure. This is a measure of the growth in output per hour paid. Labour is an easily identified input to virtually every production process.
What is an index series?
An index series is simply a way of expressing, in percentage terms, the change in some variable from a given point in time to another point in time. For example, let's say that output increased by 10 percent from an initial year (1988) to a subsequent year (1989). The index for 1988 would be 1000 while the index for 1989 would be 1100. Conversely, if output had declined in 1989 by 10 percent, the 1989 index value would be 900. These values represent growth rates, not the levels of productivity.
What is a growth rate?
Statistics NZ’s productivity measures are growth rates rather than levels of productivity (ratios of output to input). For example, a levels measure would provide figures such as three widgets produced per hour worked. However, to understand how productivity changes over time, growth rates need to be calculated. A productivity growth rate is often expressed as the increase in the productivity index in one year compared with the productivity index in the previous year. This is shown in the formula below where t is used to denote time.
Productivity growth in year t+1=(Productivity index value in year t+1-Productivity index value in year t )/(Productivity index value in year t)
As an example, let’s say the productivity index values in 2011 and 2010 are 1705 and 1550, respectively. Using the above formula, the productivity growth rate for 2011 is:
=(1705-1550)/1550=10 percent productivity growth
How do I interpret the numbers?
- the amount of output produced by an hour of paid work
- an increase in labour productivity means that an hour of paid work is producing more output than in the previous year, or that the same amount of output is being produced for fewer hours paid.
- the amount of output produced by a unit of capital
- an increase in capital productivity means that a unit of capital is producing more output than in the previous year, or that the same amount of amount is being produced for fewer capital inputs.
- the amount of output produced that cannot be attributed to labour or capital input. This is productivity due to factors such as advances in knowledge, improvements in management, or production techniques.
- an increase in multifactor productivity means that improved production techniques, for example, have led to an increase in output in comparison to the previous year while still using the same amount of inputs.
Can you give me an example of how productivity is calculated?
Table 1 gives a hypothetical example of how productivity numbers are calculated. For simplicity, the example concentrates on labour productivity growth over three years for the measurable part of the economy.
Calculating labour productivity
||Output per hour
||Growth in output per hour (%)
Symbol: ... not applicable
In this example, output per hour is calculated as output divided by labour hours. Growth is calculated as the change in output per hour from one year to the next. A value of 1000 is given to the productivity index in the first year (the base year), and subsequent years’ productivity values reflect the growth from this base year.
What are geometric means?
Geometric means are average growth rates that account for compounding over time. Arithmetic averages give higher growth rates and would lead to a different index figure for the latest year when applied to the base year.
Table 2 illustrates the difficulties in using an arithmetic mean. Assume that the index grows by 10 percent, 20 percent, and 25 percent over three years. The arithmetic average of these percentage changes is 18.33 percent ((10+20+25)/3). The geometric mean is slightly lower at 18.16 percent. The advantage of using the geometric mean is clear when the index is recalculated using these two average growth rates. When an average growth rate of 18.3 percent is used to calculate the index, the value in the final year is 1656, which is greater than the actual value of 1650. However, when the geometric growth rate of 18.16 percent is applied the correct final index value is reached.
Calculating a geometric mean
||Index based on arithmetic mean
||Index based on geometric mean
|Annual arithmetic mean
|Annual geometric mean
Symbol: ... not applicable
What is growth accounting?
Growth accounting shows how different factors contribute to changes in productivity. Total growth in labour productivity, for example, is due to the change in the amount of capital per worker and multifactor productivity. Growth accounting therefore, provides some numerical information on the relative importance of the factors that affect productivity growth as outlined above. It can also be used to show which factors contribute to changes in output.
What factors affect productivity growth?
There are a number of possible explanations for why productivity may change over time:
- a real change in the productivity of the factors of production (capital and/or labour)
- a movement from low-productivity to high-productivity resources
- savings as the firm or industry becomes larger (known as economies of scale)
- a change in knowledge, processes, organisational structure of firms, management systems, work arrangements, or technological factors
- enterprise, innovation, skills, investment, and natural resources
- a change in the way capital is used, which may overstate or understate capital input growth
- labour hoarding, which may lead to firms holding on to staff, despite a slowdown in the economy, to minimise the cost of re-hiring staff when the economy picks up again
- the time it takes workers to learn how to use new capital efficiently
- research and development, competition, the development of human capital through education, and policy.
What is the link between productivity and income?
Figure 1 shows that there is a very strong link between the growth rate in labour productivity and the growth rate in income, as measured by GDP per person (per capita).
Income growth per capita can be explained by either growth in labour productivity or growth in hours per capita, which is the growth in the average number of hours worked per person each year. This is also known as labour utilisation. Although labour utilisation may fluctuate in the short term, it is likely to remain relatively stable in the medium to long term. Therefore, the key driver of growth in income per capita is growth in labour productivity. This is the case in New Zealand and in all developed countries. As the growth in labour productivity is the key driver of income growth per capita, the 2025 Taskforce (an advisory group that was set up in June 2009 to report on progress towards the aim of closing the income gap with Australia, and to make recommendations about how best to achieve it) sees that increasing productivity growth is an important mechanism for achieving its aim.
Can I compare these numbers with other New Zealand studies on productivity?
Yes, but you will need to look at the industries covered by the study. Compare the source data in the studies, because for example, different labour input sources could have been used. Consider the approach used as well. Statistics NZ’s productivity numbers use a macroeconomic approach, while other studies may adopt a microeconomic (firm level) approach. Also, there may be differences in time series lengths (that is, the start and end dates of the series) that need to be considered.
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