What is Productivity and Why it is Important to Corporates, Nations, and Professionals?

What is Productivity and Why it is so Important?

We often hear the term Productivity, bandied about in economics and management textbooks and the popular press. Indeed, not a day goes by without this term popping up in myriad contexts.

Further, when experts talk about falling or rising productivity, they stress its importance to everything from economic growth rates to the health of nations and the efficiency of firms, and the career graph of professionals.

Thus, it is important to understand what is meant by productivity and why it is so important to all economic, political, social, and individual stakeholders.

Simply put, productivity is the output per worker measured in specific timelines and contexts and situations.

To understand this better, let us take an example of a shop floor factory worker who can say, make 10 units of something in an hour.

Thus, in this respect, productivity indicates the output that this worker can produce in an hour in a specific setting.

Further, it also indicates that when aggregated to the entire factory workforce, there is another measure of the average productivity of the entire plant or factory taken together. To explain, if another worker can make 20 units in one hour, then this particular worker is said to be more productive than the former.

On the other hand, if a third worker can produce only 5 units in an hour, then that worker is said to be less productive than the other two. Thus, what we now get is a measure of individual productivity.

As mentioned earlier, when the entire workforce is taken into consideration, then the average productivity is arrived at after taking the total units produced in an hour divided by all the workers in the plant.

How to Measure Productivity of Workers in Different Professions?

So far, we have been dealing with time as the determinant of productivity. Turning to the contextual nature of productivity, there are some occupations such as Artisans and even Management Consultants and Investment Bankers as well as Software Professionals whose productivity has to be measured in the specific situation or the context of their profession.

What this means is that one cannot compare Apples to Oranges and hence, the productivity of varied professions is different and hence, one must also mention the time and the situational as well as contextual factors that determine productivity.

This is the reason economists have developed sophisticated models wherein the aggregate productivity of the entire workforce in say a country or a region is arrived after making allowances for the various determinants.

It is also not the case that workers in different professions cannot be compared. Indeed, after making the allowances and adjustments to the models, economists usually have measures of the average productivity in each profession, and hence, this measure is widely used by corporates and nations to determine who is more productive or who is less.

Thus, this forms the basis of performance incentives and pay hikes as well as bonuses for workers and professionals, and this is the reason the measures of productivity are very important for them.

Indeed, the fact that many management consultancies and investment banks often layoff the least productive employees after each appraisal cycle indicates the importance that they attach to the productivity measures.

Why is Productivity so Important to Nations?

Turning to why productivity as a measure is so important to nations, it is the case that economic growth raises when a nation’s workforce is more productive than its rivals.

On the other hand, productivity also indicates how efficient the country’s workforce is and how well they have adjusted to technology and how innovative they are. These are very important concepts and let us spend some time discussing them.

It is often said that technology and innovation raise the productivity of workers and professionals.

Indeed, with automation and the arrival of the computing revolution, productivity has indeed increased worldwide.

The reasons are very intuitive, and when computers cut down the time it takes to produce word documents or spreadsheets and when automation ensures that our factory worker can produce 25 units per hour, then we can understand why technology plays such an important role in increasing productivity.

Moreover, innovations are also responsible for increases in productivity. For instance, if the same factory worker finds a better way to do his or her work, then he can produce 30 units per hour taking into account both the role of technology and the innovative and inventive nature of the worker.

Thus, this means that productivity goes up whenever new technologies or innovative methods are employed.

This is the reason why a region such as the Silicon Valley which is the home of the tech world and the geeks and the pioneers is often credited for improving the productivity worldwide.

The Productivity Conundrum in the Present Times

Having said that, in recent months, there have been reports that the productivity increases due to technology have peaked and hit a plateau and this is worrying many economists who see this as a challenge to their theories.

Some have proposed that we need to come up with new measures of estimating productivity to account for the Smartphone and Mobile computing revolution as well as the New Sharing Economy where it is difficult to differentiate between producers and consumers.

Thus, we stand at a cusp of a new paradigm where older measures of productivity and innovation and their impact no longer suffice and hence, some experts are already working on the Conundrum of High Growth and Low Productivity.

To conclude, productivity is a measure that is of utmost importance to corporates, nations, and professionals.


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