Productivity basics

Written by Stephen Poloz

Economists toss around the notion of productivity as if everyone should know instinctively what they mean. But productivity is complex, and there are many ways to increase it.

In its purest form, productivity is a measure of what we are able to produce from a given set of inputs, essentially labour and capital. For example, if a group of workers can increase output per hour by 10% through better teamwork, then that is increased productivity.

To some people, higher productivity means fewer workers, so productivity becomes a codeword for layoffs. This may be true for a company in distress, where the choice is between boosting productivity or corporate death, but most would agree that it is better to save some jobs than to lose them all. In contrast, for a healthy company, higher productivity means an even more competitive product or service, which translates into increased sales, jobs, profits and wages. In other words, productivity growth translates into high-quality employment growth over time.

How do companies increase their productivity? One obvious way is to develop a totally new product or service, or create a new technology, that leads to a jump in revenue per employee. This form of productivity is generally the result of innovation, through R&D, but the effect would be the same if the breakthrough came via a more inspired marketing program.

A less exotic form of productivity growth happens when companies invest in new equipment, automating more tasks, improving quality so there are fewer defects, and so on. When the economy is expanding this sort of productivity growth happens everywhere, because companies that expand their plants or build new ones generally equip them with the latest technology.

At the more mundane level is the concept of organizational productivity, which is mostly based on the concept of specialisation. As Henry Ford proved with the invention of the assembly line, giving workers increasingly specialised jobs or functions leads to a big increase in productivity.

Today’s assembly line transcends geography. To increase organizational productivity companies are dividing their products and services into low-productivity tasks and high productivity tasks, and then having the low-productivity tasks performed in countries where wages are lower. This means that the better-paid domestic workers specialise on higher-productivity tasks, thereby increasing domestic productivity and reducing costs. This is simply the notion of supply chain globalisation, and the lower costs should ultimately lead to more sales and high-productivity employment growth.

The bottom line? Increased productivity is the key to continued improvement in Canadian living standards, especially given the increasingly stiff international competition we face. Fortunately, the current environment offers fertile ground for productivity enhancements.

August 18, 2005

The views expressed here are those of the author, and not necessarily of Export Development Canada.

Originally appeared on PROFITguide.com