Productivity is the most important determinant of the standard of living of a group of people, a nation or a planet. Productivity in its simplest form is output per hour worked, and its recent slower growth rate is distressing. This article summarizes why productivity is crucial to our standard of living. The next article explains its determinants and forecast.
The great gains in standard of living have come from higher output per hour. That was true of the United States and Europe during the industrial revolution, and it’s true of Asia in recent years . Gain could, theoretically, have come from a change in distribution: more income going to workers, and less to owners of capital. Despite recent talk about inequality, changes in income distribution have not driven rising living standards over long periods of time. Rising incomes result from rising productivity.
Note that when “productivity” is used alone, it usually refers to labor productivity, but the concept can be applied to other factors of production. We sometimes refer to energy productivity (output per unit of energy used), and factory managers look at the ratio of output produced to raw materials used. In this article we focus on labor productivity.
Labor productivity is not well measured. In manufacturing, it’s easy to compare the dollar value of goods produced to the person-hours of labor required to produce those goods. It’s much harder in services. Take banking, for example. Your checking account is clear as mud. The bank provides to you the service of processing checks, for which you don’t pay (aside from exorbitant fees for bounced checks and stop-payments). However, the bank does not pay you a market rate of interest on the money you keep in the your checking account. It’s a trade: free services in exchange for free account balances. Government statisticians estimate the dollar value of the trade, so that the productivity of bankers can be assessed, but the figures are not very precise. Health care is another area where data don’t allow very accurate estimates on productivity. So productivity statistics provide a general tone, not high-fidelity notes.
