Productivity is a measure of how efficiently a company, industry, or society uses inputs, or factors of production (e.g., labor, energy, capital) to generate products and services. A number of methods can be used to measure productivity. In a factory, productivity might be measured based on the number of man-hours to produce a good, and in the service sector, a common measure of productivity would be revenue per employee, that is, the total amount of revenue generated by an employee divided by that employee’s salary. It should be noted that, because output is more difficult to measure in the services sector, productivity measurements in that sector tend to be less reliable than is the case in manufacturing.
Productivity is a central issue in global business. Productivity is driven by a number of forces, including technological and organizational innovation, interest rates and availability of capital for investment, the level of entrepreneurialism within a society, and, more recently, scale and effectiveness of outsourcing activity undertaken by a society’s corporate community in order to realize economies of specialization. Because it is a crucial component in the degree of competitiveness of one country relative to another, productivity is an important indicator of how attractive a country is as a host for foreign direct investments as well as how able one country will be in gaining foreign markets.
The Industrial Revolution from the mid-19th to the early 20th century saw an unprecedented rise in productivity, first in England and then within the United States. Labor-saving technology, innovation in organizing work and process flow, and the coming of the mass production revolution continually raised the upper limit of efficiency with which factors of production were used to create final products and services. Productivity grew, not simply because of the introduction of new types of production technology onto the factory floor, but also in the ability of enterprises to effectively link this technology to all phases of business operations, including supply, distribution, and marketing.
By the 1970s, certain industries that regularly expanded their productivity, such as power generation, reached the technological limit to these increases. Similar barriers to productivity growth are anticipated in computers and information technology by 2020. At that point, semiconductor chips reach the point of diminishing returns to specialization and Moore’s Law begins to break down. Another technological revolution will then be required, involving a new generation of advanced materials and hardware to break through these barriers and set semiconductors on a new path of expanding productivity.
Within the United States, the trend rate of labor productivity in the post–World War II period went through three phases: rapid growth—annual average rate (AAR) of 3.2 percent—from the late 1940s to 1973; slower growth (AAR 1.5 percent) from 1973 to 1994; and an acceleration in growth (AAR 2.5 percent) from 1995 to 2005. The two decades following the war saw rapid and effective development of productivity enhancing innovation, part of which originated prior to and during World War II. The decline in productivity during the 1970s and 1980s came in the wake of a technological slowdown by the large corporations in such traditionally productivity-enhancing areas as petrochemicals, advanced materials, and mechanical systems, in part the result of increasing costs of R&D; it was also because of the continued inability of companies to effectively integrate the output of an emerging information and communications sector (ICT) across the functional areas of business activity.
The acceleration of productivity in the 1990s, especially within the United States, resulted from a resurgence of technological innovation, not from the large corporations as in the past, but from small start-up firms—supported by an increasingly specialized venture capital community—and licensing the fruits of research conducted by universities and government laboratories. These innovations, such as a new generation of advanced materials that started coming on line in the late 1980s, fed into the ICT sector, also composed of a growing proportion of innovative small and medium-sized firms. This technology transfer between sectors, in turn, pushed the memory capacity of, and thus the number of functions accomplished at faster speeds by, a new generation of ICT hardware to ever higher levels. At the same time, it opened the way for a significant reduction in the costs in the production of semiconductors, resulting in sharply falling prices in ICT equipment and systems.
By the 1990s, the business community invested in ICT equipment and software as never before. It integrated the technology throughout companies, thus linking together different functional areas all along the supply chain, from cash registers linked to bar code systems and connected to inventory control units in warehouses to computers and peripherals connecting different floors within buildings and different facilities across the United States and globally.
The implementation of ICT systems across business operations accelerated productivity in such areas as data processing, inventory control, and Just-in-Time (JIT) delivery.
Productivity, Economic Growth, And The Competitive Advantage Of Nations
The ability of a country to achieve economic growth, and so compete globally, closely shadows productivity trends. In the first place, slack productivity growth prevents resources from being generated and used in the most effective manner. Thus, critical resources are wasted that could be applied to augmenting opportunities for improving the material qualities of life and this dampens prospects for robust economic growth. Conversely, robust productivity increases private purchasing power and, through an expanding tax base, the prospects of heightened government services for technology creation, infrastructure, education, healthcare, and other important factors driving economic growth. Higher productivity also reduces inflationary pressures since the economy could (theoretically) grow at a faster rate without fear of widespread price increases. In general, long-term productivity growth is commonly viewed as the speed limit for sustainable economic growth.
Comparing productivity trends in the United States vs. the European Union (EU), we find that the United States has surged ahead of Europe, especially during the 1990s. In terms of gross domestic product (GDP) per worker and GDP per hour, the United States, by 2000, exceeded European productivity by 20 percent. Starting in 1990, growth of real GDP in the United States was greater than that of both the EU (and Japan as well) by 25 percent to 30 percent. Because of its achievements in productivity growth from the 1990s, stemming for the most part from its technological leadership, the American economy has been growing faster than the economies of many European countries, and of the EU as a whole. From 1980 to 2005, the economic growth rate for the EU averaged 2.1 percent—with a number of major economies such as Germany doing considerably worse on average—in comparison with an average annual rate of 3 percent for the United States. Indeed, despite the elimination of trade barriers and the close economic integration resulting from the single market, the EU continued to lag behind, and significantly so, the United States as an economic performer, with several EU members—including Germany, France, and Italy—close to economic stagnation during this period.
A number of reasons can be brought forward to account for this global discrepancy in productivity, economic growth, and competitiveness. These include the EU’s constraint by inflexible labor markets, rising energy prices, and increased competition from Asia. Cultural differences regarding leisure time as an influence on productivity differences also come into play; the significantly greater number of hours dedicated to work in the United States appears to be one component in America’s production gains. However, even when these factors are taken into account, the divergence in productivity between the United States and the EU remains, indicating the primary importance of U.S. technology creation and implementation across business functions to productivity growth.
Over the next two decades, technology is expected to play an even greater role in driving productivity gains and, in turn, economic growth within and between nations. In the 1970s, less than 50 percent of economic growth came from technological change. In 2008 this figure has increased to over 75 percent; by 2030 it is estimated that new technology will account for between 80 percent and 90 percent of a country’s economic growth. Assuming that the technical barriers imposed by the limits of Moore’s Law can be scaled, information and communication technology (ICT) systems and their implementation across business operations will continue to dominate the industrialized and emerging economies. However, energy and biotechnology innovation will generate an increasing proportion of productivity (and economic) growth, especially within the developed part of the world.
- G. Anderson and K. L. Kliesen, “The 1990’s Acceleration in Labor Productivity: Causes and Measurements,” Review (Federal Reserve Bank of St. Louis, 2006);
- Bergstrom and R. Gidehag, EU Versus USA (Timbro, 2004);
- Tito Boeri, Michael C. Burda, Francis Kramarz, and Pierre Cahuc, Working Hours and Job Sharing in the EU and USA: Are Europeans Lazy? or Americans Crazy? (Oxford University Press, 2008);
- Ian Dew-Becker and Robert J. Gordon, The Role of Labor Market Changes in the Slowdown of European Productivity Growth (National Bureau of Economic Research, 2008);
- Harold O. Fried, C. A. Knox Lovell, and Shelton S. Schmidt, The Measurement of Productive Efficiency and Productivity Change (Oxford University Press, 2008);
- Oded Galor and Andrew Mountford, “Trading Population for Productivity: Theory and Evidence,” Review of Economic Studies (v.75/4, 2008);
- Philipp Koellinger, “The Relationship Between Technology, Innovation, and Firm Performance—Empirical Evidence From E-Business in Europe,” Research Policy (v.37/8, 2008);
- Geoff Lewis, Innovation and Productivity: Using Bright Ideas to Work Smarter (New Zealand Treasury, 2008);
- Mario Davide Parrilli, Roger Sugden, and Patrizio Bianchi, High Technology, Productivity and Networks: A Systemic Approach to SME Development (Palgrave Macmillan, 2008);
- World Economic Forum, Global Competitiveness Report (2006).
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