What is productivity?

PRODUCTIVITY MEASURES how well firms, industries, or countries transform inputs into outputs or goods and services (efficiency) to satisfy the tastes and preferences of customers (effectiveness).

Productivity can be expressed as partial-factor productivity (PFP) or total-factor productivity (TFP). PFP is the ratio of output to one input factor (capital, labour, energy, materials, and services). For example, labour productivity or output produced for every employed worker is the commonest PFP measure. TFP measures the efficiency with which all input factors are used.

Its measurement requires aggregating all factor inputs into one index. Productivity improvement takes place when growth of outputs is faster than growth of inputs.

Productivity improvement translates into lower cost of production and improved quality. Growth in productivity, whether measured as PFP or TFP, leads to lower cost of production and or better quality. For example, lower cost of production could result from waste reduction, process reengineering, worker engagement, new technology, innovation, and improved resource allocation, to name a few.

Productivity improvement leads to enhanced competitiveness. Lower cost of production, better quality goods and services, improved customer service, and improved delivery times are factors that will enhance the ability of Jamaican firms to compete in local, regional, and global markets. As these Jamaican firms compete better, they become more profitable and are able to gain market share. Accordingly, they reinvest some of their profits to expand to satisfy the rising demand for their goods and services.

Productivity improvement leads to growth in employment and wages. Holding wages constant, the most productive companies will find it profitable to hire more workers, and this drives up the wage rate.

A more intuitive explanation is that lower cost of production allows businesses to make larger profits and, therefore, pay their workers better wages and benefits as well as invest more in their training and development.

Look around. More productive companies can afford to treat their workers better.

Productivity improvement leads to economic growth in several ways.

First, growth in productivity releases factors of production for employment in other firms and other industries where they are better rewarded. The common example is rising productivity in agriculture due to the adoption of new technology which causes yield per worker to rise and allows cheaper and better quality output for domestic consumers, agro processors, and exporters.

Second, higher wages boost aggregate consumption and generate more tax revenues for Government to pay for the provision of public goods, which further boosts productivity. The end result is a larger, more dynamic economy.

INDUSTRIAL REVOLUTION

Productivity improvement translates into prosperity or living standards. Productivity growth has been the driver behind the spectacular performance of economies such as the United States and Europe during the Industrial Revolution as well as – Japan, Taiwan, South Korea, Singapore, and more recently, China. It will be a necessary condition for enabling Jamaica to escape the so-called middleincome trap. Higher productivity leads to increased wages and employment, two manifestations of prosperity.

Gaps in productivity between Jamaica and its trading partners (firms, industries, and economies) eventually gets transferred to living standards. Among the factors usually responsible for these productivity gaps are efficient public sector, application of technology and innovation, upskilling of the labour force, improved quality of management, intense competition in the market for goods, capital, and labour, as well as changing cultural attitudes in the workplace.

Fortunately, these factors can be influenced by captains of industry, those responsible for allocating resources and those entrusted with making policy. Jamaica can escape the lowgrowth middle-income trap, but increasing productivity must become a basic goal of economic policy.