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Measuring Productivity. Marc Prud’Homme University of Ottawa Last update: 14/09/12. Definition. Productivity is a measure of the efficiency of production. Productivity is a ratio of production output to what is required to produce it (inputs).
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Measuring Productivity Marc Prud’Homme University of Ottawa Last update: 14/09/12
Definition • Productivity is a measure of the efficiency of production. • Productivity is a ratio of production output to what is required to produce it (inputs). • The measure of productivity is defined as a total output per one unit of a total input. • These definitions are short but too general and insufficient to make the phenomenon productivity understandable. • A more detailed theory of productivity is needed, which explains the phenomenon of productivity and makes it comprehensible.
Definition • In order to obtain a measurable form of productivity, operationalization of the concept is necessary. • In explaining and operationalizing productivity a set of production models are used. • A production model is a numerical expression of the production process that is based on production data, i.e. measured data in the form of prices and quantities of inputs and outputs.
Purposes of productivity measurement • A frequently stated objective of measuring productivity growth is to trace technical change. • Identifying changes in efficiency • Productivity measurement in practice could be seen as a quest to identify real cost savings in production • Measurement of productivity is a key element towards assessing standards of living. A simple example is per capita income, probably the most common measure of living standards: income per person in an economy varies directly with one measure of labour productivity, value added per hour worked. In this sense, measuring labour productivity helps to better understand the development of living standards.
Why is productivity and measuring it are important? • The benefits of high productivity are manifold. • At the national level, productivity growth raises living standards because more real income improves people's ability to purchase goods and services, enjoy leisure, improve housing and education and contribute to social and environmental programs. • Productivity growth is important to the firm because more real income means that the firm can meet its (perhaps growing) obligations to customers, suppliers, workers, shareholders, and governments (taxes and regulation), and still remain competitive or even improve its competitiveness in the market place.
Productivity in the news • (G & M) Stalling start-ups stretch Canada’s productivity gap: report: http://www.theglobeandmail.com/report-on-business/economy/canada-competes/stalling-startups-stretch-canadas-productivity-gap-report/article4578205/ • (G & M) The puzzling fall of Britain’s labour productivity: http://www.theglobeandmail.com/report-on-business/economy/economy-lab/the-puzzling-fall-of-britains-labour-productivity/article4558408/ • (G & M) Do Canadians lack the productivity gene? http://www.theglobeandmail.com/report-on-business/economy/economy-lab/do-canadians-lack-the-productivity-gene/article617809/
Productivity in the news • (Financial Post) Canada’s productivity gap is looking worse than ever: http://business.financialpost.com/2012/05/29/canadas-productivity-gap-is-looking-worse-than-ever/
Characteristics of production • Economic well-being is created in a production process, meaning all economic activities that aim directly or indirectly to satisfy human needs. • The degree to which the needs are satisfied is often accepted as a measure of economic well-being. • Economic well-being also increases due to the growth of incomes that are gained from the more efficient production. • The most important forms of production are market production, public production and production in households. • Market production is the prime source of economic well-being and therefore the “primus motor” of the economy. • Productivity is in this economic system the most important feature and an essential source of incomes.
National productivity • In order to measure productivity of a nation or an industry, it is necessary to operationalize the same concept of productivity as in a production unit or a company, yet, the object of modelling is substantially wider and the information more aggregate. • The calculations of productivity of a nation or an industry are based on the time series of the SNA, System of National Accounts. • Productivity is considered a key source of economic growth and competitiveness and, as such, is basic statistical information for many international comparisons and country performance assessments. • There are different measures of productivity and the choice between them depends either on the purpose of the productivity measurement and/or data availability.
National productivity • One of the most widely used measures of productivity is Gross Domestic Product (GDP) per hour worked. • Underlying series of Gross Domestic Product refer to GDP in national currency, at constant prices, OECD base year 2005 for each country • Labour input is defined as total hours worked of all persons employed, multiplied by the corresponding and consistent measure of employment for each particular country.
Labour productivity in numbers • Go to Library main age…
National productivity • Another productivity measure is so called multi factor productivity (MFP) also known as total factor productivity (TFP). • It measures the residual growth that cannot be explained by the rate of change in the services of labour, capital and intermediate outputs, and is often interpreted as the contribution to economic growth made by factors such as technical and organisational innovation. (OECD 2008,11) • Productivity measures are key indicators of economic performance and there is strong interest in comparing them internationally.
Lets elaborate on some of the more popular measures of productivity
Labour productivity based on gross output • Shows the time profile of how productively labour is used to generate gross output. • Labour productivity changes reflect the joint influence of changes in capital, intermediate inputs, as well as technical, organisational and efficiency change within and between firms, the influence of economies of scale, varying degrees of capacity utilisation an measurement errors. • Labour productivity only partially reflects the productivity of labour in terms of the personal capacities of workers or the intensity of their effort. • The ratio between output and labour input depends to a large degree on the presence of other inputs, as indicated above.
Labour productivity based on gross output • Purpose: Gross-output based labour productivity traces the labour requirements per unit of (physical) output. It reflects the change in the input coefficient of labour by industry and can help in the analysis of labour requirements by industry. • Advantages: Ease of measurement and readability. In particular, the gross-output measure requires only prices indices on gross output, not on intermediate inputs as is the case for the value-added based measure. • Drawbacks and limitations: Labour productivity is a partial productivity measure and reflects the joint influence of a host of factors. It is easily misinterpreted as technical change or as the productivity of the individuals in the labour force.
Labour productivity based on value added • Shows the time profile of how productively labour is used to generate value added. • Labour productivity changes reflect the joint influence of changes in capital, as well as technical, organisational and efficiency change within and between firms, the influence of economies of scale, varying degrees of capacity utilisation and measurement errors. • Labour productivity only partially reflects the productivity of labour in terms of the personal capacities of workers or the intensity of their effort. • The ratio between output and labour input depends to a large degree on the presence of other inputs, as mentioned previously.
Labour productivity based on value added • In comparison with labour productivity based on gross output, the growth rate of value added productivity is less dependent on any change in the ratio between intermediate inputs and labour, or the degree of vertical integration. • For example, when outsourcing takes place, labour is replaced by intermediate inputs. • This leads to a fall in value added as well as a fall in labour input. • The first effect raises measured labour productivity; the second effect reduces it. • Thus, value-added based labour productivity measures tend to be less sensitive to processes of substitution between materials plus services and labour than gross-output based measures.
Labour productivity based on value added • Purpose: At the aggregate level, value-added based labour productivity forms a direct link to a widely used measure of living standards, income per capita. Productivity translates directly into living standards, by adjusting for changing working hours, unemployment, labour force participation rates and demographic changes. • From a policy perspective, value-added based labour productivity is important as a reference statistic in wage bargaining. • Advantages: Ease of measurement and readability. • Drawbacks and limitations: Labour productivity is a partial productivity measure and reflects the joint influence of a host of factors. It is easily misinterpreted as technical change or as the productivity of the individuals in the labour force.
Capital-labour MFP based on value added • Formula: Quantity index of combined labour and capital input = Quantity index of (different types of) labour and capital, each weighted with its current-price share in total value added. • Capital-labour MFP indices show the time profile of how productively combined labour and capital inputs are used to generate value added. • Conceptually, capital-labour productivity is not, in general, an accurate measure of technical change. • It is, however, an indicator of an industry’s capacity to contribute to economy-wide growth of income per unit of primary input.
Capital-labour MFP based on value added • In practice, the measure reflects the combined effects of disembodied technical change, economies of scale, efficiency change, variations in capacity utilisation and measurement errors.
Capital-labour MFP based on value added • Purpose: Analysis of micro-macro links, such as the industry contribution to economy-wide MFP growth and living standards, analysis of structural change. • Advantages: Ease of aggregation across industries, simple conceptual link of industry-level MFP and aggregate MFP growth. Data directly available from national accounts. • Drawbacks and limitations: Not a good measure of technology shifts at the industry or firm level. When based on value added that has been double-deflated with a fixed weight Laspeyres quantity index, the measure suffers from the conceptual and empirical drawbacks of this concept.
KLEMS Multifactor productivity • Shows the time profile of how productively combined inputs are used to generate gross output. • Conceptually, the KLEMS productivity measure captures disembodied technical change. • In practice, it reflects also efficiency change, economies of scale, variations in capacity utilisation and measurement errors. • When capital and intermediate input measures are aggregators of detailed types of assets and products, each weighted by their respective share in total cost, and based on prices that reflect quality change, the effects of embodied technical change are picked up by the capital and intermediate inputs terms, and only disembodied technical change enters the MFP measure.
KLEMS Multifactor productivity • Purpose: Analysis of industry-level and sectorial technical change. • Advantages: Conceptually, KLEMS-MFP is the most appropriate tool to measure technical change by industry as the role of intermediate inputs in production is fully acknowledged; “Domar” aggregation of KLEMS-MFP across industries provides an accurate picture of the contributions of industries to aggregate MFP change • Drawbacks and limitations: Significant data requirements, in particular timely availability of input-output tables that are consistent with national accounts; Inter-industry links and aggregation across industries more difficult to communicate than in the case of value-added based MFP measures
National productivity • The OECD publishes an annual Compendium of Productivity Indicators that includes both labour and multi-factor measures of productivity.
