|9. How to increase productivity|
productivity is the value of output obtained with one unit of input.
For example, if a worker produces in an hour an output of 2 units, whose
price is 10$ each, then his productivity is 20$.
Average economic productivity is computed by dividing output value and
(time/physical) units of input. If the production process uses only one
factor (e.g. labour) this procedure gives the productivity of that factor,
in this case labour productivity.
When more than one input is used, for each factor it is possible to compute by the same procedure its productivity, called in this case "partial".
"Total factor productivity" is the attempt to construct a productivity measure for an aggregation of factors. The meaningfulness of such an aggregation requires additional hypotheses, thus it is not assured in a general framework.
change is fast only in some industries, whereas in many others it is much
On an individual scale, physical productivity depends on the difficulty of the task, the skills of the worker and its learning curve (the number of times he already performed the task and how he was guided by good "teachers / masters"). For example, think at an unskilled buyer assembling an IKEA piece of furniture for the first time: he will be looking for avoiding mistakes more than optimising the time to work. If he purchased a second piece, he will be much more productive (i.e. will need less time to assembly it). After a few pieces his productivity will level off with no further large improvements.
On a macroeconomic level, labour productivity, i.e. GDP per worker, depends on the corrisponding dynamics of the two aggregates (GDP and employment). Productivity will rise if GDP increases faster than employment.
A decoupling of labour market and macroeconomic policies can lead to higher employment without GDP growth, leading to a lower productivity.
degree of productive capacity utilization is conducive to high productivity
of labour and capital.
A prolonged structural increase in productivity is the result of many factors, among which the following:
capital accumulation through investments;
At firm level, firms' incentives increase workers productivity through a stimulating environment and the removal of obstacles to their effective work.
In a broader perspective, an increase of productivity is due to a squeeze in waste of resources, to narrower limits of irrational processes of production and governance, to an effective link between market and social needs.
Higher productivity first impacts usually on profits;
then, with lags and without automatic mechanisms, on wages.
Firms can afford to pay them without losing market shares but it's on
workers the effort to organize and get pay increases.
If production costs do not overshoot that productivity increase, unit cost of production will be lower, opening the possibility of price fall or stability. In this vein, higher productivity is conducive to lower inflation.
higher profits due to high productivity generate the cash flow, foster
trustworthiness for loans and equity investors, as well as the reason
for larger investments. If they entails economies
of scale and are matched by a growing demand, and these dynamics take
place in a sufficienty large share of the economy, an important supply-side
based mechanism of GDP growth is put into motion.
International competitiveness will increase by the same chain of reasons, boosting exports by a combination of lower prices and better quality. This in turn should improve the trade balance, reducing the need for aid and providing currency to pay back the possible debt cumulated towards foreign entities.
If the increase of
GDP is slower than the increase in productivity, a fall in employment
will take place (as a matter of definition!).
If a firm dismisses
workers after having invested in new machines, technological unemployment
will take place.
If on the contrary
the improved production can be sold at higher prices or produced with
less wasted materials and energy, output value
added can rise and one can obtain even an increase in employment.
Employment in machine-producer industries will rise in both situations.
Higher productivity in the public sector reduces the time and improves the quality of response to society demands, possibly increasing the consensus politicians enjoy. Instead, much of political debate between lower taxes and higher welfare protection leads to reciprocal dissatisfaction because of the appaling low productivity of public services.
Productivity has grown in the long run in almost all countries in the
world. In rich countries, GDP soared mainly through productivity increase.
Countries with a low productivity increase are among the poorest of the
Wide productivity differentials in the world are the main explanation of dispersion of per-capita income.
after high peaks, GDP slowing dynamics is not immediately matched by employment.
Productivity per worker falls.
far as recession takes momentum, firms begin to dismiss workers in attempt
of reducing losses. This move should increase productivity again, but
dismissed workers reduce their consumption and GDP contract further. The
net effect on productivity depends on the speed and strength of the two
recovery begins, once more employment is lagging, thus there is a drastic
improvement in productivity and productive capacity utilization. These
developments positively impact on profits and
on the willingness of firms to invest.
on institutional incentives, firms can opt for an unbalanced mix of the
on the aggregated effect of these decentralized choices, productivity
will more or less increase with GDP rise.
At peaks, productivity is much higher than in troughs.
You can increase the internal productivity of 1. production processes, 2. of the decision-making and governance processes as well 3. the external-to-the-firm productivity of the environment in which it operates.
In the first field, there are several opposed trajectories that allows for increasing productivity, intertwining micro and macro levels.
Physical productivity of a production process can rely on faster and bigger machines, performing simplified and repetitive tasks strictly matching the requirements (inputs-outputs) of further machines (assembly line). Typically this method of increasing the number of products obtained per hour corresponds to repetitive tasks performed by low-skilled labour, whose low wages (possibly due to a weak trade union, legal setting easing firing and high unemployment) lead to high economic productivity (which, however, will depend on the price of product sold - if it is low because of low quality and in order to address large segments of low-income television-dependent consumers, only very large, stable and predictable sales can generate enough total margins to justify the high capital investment in machines, which in turn requires television large-scale advertising: economies of scale and barriers to entry are established - possibly leading to oligopoly without new entrants). This mechanism works "well" (leaving for the moment aside the social pain, worker - and consumer - alienation and many other negative effects it involves) if GDP growth provides the macroeconomic conditions for market expansion (increase of production, increase of productivity, lower price, higher demand, increase of sold production) but it enters in tough difficulties in case of GDP stagnation and market saturation (due to the cumulative bundle at households and their low level of income leading to postponement of repurchasing). International competition (e.g. from very big countries where internal market allows for reaping economies of scale) can shift domestic demand towards imports (leakage).
An opposite way to raise productivity is creativity. A creative person can generate high value products in short time - an extremely high productivity largely irreproducible by machine. This is not only the case of people like Picasso (who stated "I don't seek, I find"), whose production has a skyrocketed value, but more in general of a society where everybody is well educated and trained in what's his and her inclinations and talents can lead to excellent and intriguing results. High labour skill - possibly in connection with all-purposes machines like computers - generate high productivity. The economic productivities of such processes is enhanced by a market which recognizes and pays for quality and innovativeness and a business / network organisation and routines that allows for such creativity to flourish (instead of being repressed).
In between these two extremes, you would find, on the one hand, "mass customerization" and the exploitation of product platforms (crossing standard components and differentiating details) to get "economies of scope", and, on the other hand, craftsmanship where individual human creativity, skills and styles generate highly differentiated goods and services.
In the second field, many decision-making processes are dysfunctional, with hiatus between stated goals and implementation, the on-going re-definition of goals and tools, with the adoption of partial solutions which generate bottlenecks and disadvantages on other performance indicators, etc. Raising productivity in this field would involve changing governance routines (e.g. the timing, the number and the disciplines of people involved since the very beginning on the decision, the qualification of people involved in the implementation, etc) as well as modifying the shape of the network that actually takes decisions. "Smart decisions" instead of "stupid" ones would raise group and individual productivity. Please note that in bureacracy and office work, many production processes are at the same time decision-making processes (e.g. the concession of a "permit to build" is a task for the Municipality office but at the same time is a decision changing the landscape).
In the third field, higher productivity is obtained in a country by improving infrastructure, connections, availability of supply chain services, the urban and rural spatial organization, the source, the use and the business model of energy, as we are proposing in specific fields. Less niches of privilege and higher remuneration of quality are horizontal goals for policies to raise productivity.