Productivity is the relationship between the quantity of goods and services produced and the resources used in their production. In economics, it is generally expressed as output divided by input, measured for a firm, industry, sector, or economy. Productivity increases when output grows faster than inputs, or when the same output requires fewer resources. It differs from total production: an economy can expand output by employing more people without increasing output per unit of input. The principal statistical measures are labor productivity and total factor productivity. (bls.gov)
Principal measures
Labor productivity measures output per unit of labor input, usually per hour worked:
where denotes real output and denotes hours worked. Output per worker is another common measure, but hours better capture differences in part-time employment, overtime, and working schedules. Labor productivity reflects the combined effects of workers, equipment, organization, and technology; it is not a direct measure of individual effort or ability. (bls.gov)
For illustration, a workshop producing 100 identical items in 20 labor hours has productivity of five items per hour. Producing 120 items in the same time raises productivity to six items per hour, a 20 percent increase. Producing 120 items in 24 hours expands production but leaves productivity unchanged.
Total factor productivity (TFP), also called multifactor productivity, relates output to a combined index of inputs. Aggregate measures often combine labor and capital services; industry measures may additionally include energy, materials, and purchased services. Inputs are weighted rather than simply added, commonly using their shares in production costs. TFP growth represents output growth not accounted for by measured input growth. It can reflect technical progress, organizational improvements, scale effects, and resource reallocation, rather than technology alone. (bls.gov)
Measuring output and inputs
At the economy-wide level, labor productivity is commonly measured as real gross domestic product (GDP) per hour worked. Industry measures frequently use real value added, which subtracts intermediate inputs from output. Gross-output or sectoral-output measures are also used, with corresponding input definitions. Consistency between the output measure and the inputs included is essential. (oecd.org)
“Real” output refers to production volumes rather than current monetary receipts. Rising sales caused solely by inflation do not establish a productivity improvement. Statistical agencies therefore separate price movements from changes in quantities and quality. These adjustments become difficult when products change rapidly or services lack easily observable units. (oecd.org)
Labor estimates must cover the same production boundary as output in the national accounts. Depending on the measure, this includes employees, self-employed people, and other participating workers. Capital input represents the productive services supplied by assets, not merely their purchase price. More detailed calculations also adjust labor input for changes in workforce composition, such as education and experience. (oecd.org)
Sources of productivity growth
Labor productivity can rise through capital deepening: workers have more or better productive equipment available per hour. It can also increase through human capital improvements associated with education, training, and experience, or through technological change and better management. These mechanisms interact; new equipment may require new skills and revised production processes. (bls.gov)
Innovation and the spread of existing technologies can improve production methods. However, adoption alone does not guarantee equivalent gains across firms. Research on digitalization emphasizes complementary skills, organizational capabilities, and investment. Research and development, innovation diffusion, competition, and infrastructure are among the factors examined in explaining productivity differences. (oecd.org)
Aggregate productivity also changes when resources move between activities. Structural transformation toward higher-productivity industries, or reallocation toward more productive firms within an industry, can raise aggregate output per hour even without improvements in every producer. Growth accounting separates contributions from capital intensity, labor composition, and TFP, although the decomposition depends on measurement conventions and economic assumptions. (bls.gov)
Economic significance
Productivity is central to economic growth because it allows higher output without proportionate increases in resource use. Nevertheless, productivity and GDP per capita are distinct. The accounting identity
shows that output per person depends on output per hour and hours worked per person. Employment and working-time patterns therefore influence average income alongside productivity. (oecd.org)
Productivity also enters unit labor cost, defined as labor compensation divided by output, equivalently hourly compensation divided by output per hour. Holding hourly compensation constant, higher productivity lowers labor cost per unit. Productivity growth can therefore offset increases in compensation, which includes wages and employer-provided benefits. (bls.gov)
Comparisons and limitations
International comparisons commonly convert output using purchasing power parities, which account for national price-level differences, rather than ordinary exchange rates. Comparability nevertheless depends on consistent output definitions, working-hours estimates, and quality adjustments. A country's industrial composition also affects its aggregate productivity level. (oecd.org)
Services present particular measurement difficulties. Better advice, convenience, or reliability may be incompletely captured in real output. Non-market services lack observed market prices; where output is estimated from inputs, measured productivity growth is constrained by construction. Zero-price digital services can provide benefits that are imperfectly reflected in GDP. Consequently, measured productivity should not be interpreted as a comprehensive measure of quality of life or consumer welfare. (oecd.org)