Productivity is a measurement of how efficient a production process is. It is calculated as a ratio of output to input. Within the same organization, in a given period of time, productivity may not be the same.
Depending on so many factors, productivity can increase or decrease. A rise in productivity is what is referred to as productivity growth.
What is Productivity Growth?
Productivity growth simply refers to an improvement or increase in the efficiency of work or production. Generally, productivity growth is depicted by an increase in total output or production.
However, an increase in total output or sales does not automatically mean there is growth in productivity. Since managers know that an increase in output does not necessarily mean there is an increase in efficiency, they find it very important to analyze and calculate the real productivity growth.
On the contrary, naïve or very inexperienced persons assume a general rise in output or sales means there is increased efficiency in their production process. It is however important to effectively calculate productivity growth in order to make strategic and proactive business decisions.
Instances where Productivity growth occurs
The most common way a growth in productivity occurs is when there is an increase in output. Even when output increases, one of these conditions must be present before productivity growth will occur:
- If there is an increase in output whiles input remains constant
- An increase in output with whiles input declines
- A higher proportional increase in output coupled with a lower proportional increase in input.
Two common factors that drive Productivity Growth
Technology is one factor that leads to productivity growth. A company, after purchasing new technological devices, computers and equipment, may have no more need of some employees. This new machine may help increase output and this affects productivity growth positively. Likewise, the cost of operating the equipment may be less expensive than the combined annual wages of the former employees which means a decrease in input – which is also a positive to productivity growth.
Example: ABC employed 10 employees who received a monthly $800 salary each. Jointly, they could assemble 20 cars per month. The company offloaded the workers and purchased a $100,000 plant which produces 35 cars per month and has a useful life of 1 year. It consumes $200 worth of energy monthly.
1) Employee Productivity:
Output: 20 x 12 = 240
Input: $800 x 10 x 12 = $96000
Productivity = 240/$96000 = 1/$400
2) Plant Productivity:
Output: 35 x 12 = 420
Input: $100000 + ($200 x 12) = $102,400
Productivity = 420/$102,400 = 1/$284.4
From the above, it costs the company $400 on each car when using labor whiles it costs them $284 per car when using the plant. This means there is a growth in productivity or efficiency – they are spending less to get the same output.
Another driver of productivity growth is improvement in the labor force. When workers acquire more skills, they become more efficient and their contributions to total output increases. Sometimes, certain incentive schemes like bonuses and overtime can help increase their overall output whiles increased morale at the workplace also yields similar results.
Managers who consider the various components of their inputs and take the necessary proactive steps to improve or change them experience productivity growth within their organizations.