• Thinking Productively About Productivity
  • Man vs. Machine Learning
  • What Countries Are Most Productive, And Why?

"Productivity isn't everything, but, in the long run, it is almost everything."
– Paul Krugman, The Age of Diminishing Expectations (1994)

Productivity measures how well an economy uses its resources. It is key to a wide range of social outcomes: job creation, economic growth and even life expectancy. But throughout most of the current expansion, global productivity has stagnated. Measurement challenges are responsible for some of this disappointing trend, but it is also the result of systemically cautious business investment. Fortunately, we’ve seen recent signs that productivity may be rising more rapidly.

The concept of productivity is a simple ratio of outputs to inputs. In economic discussions, the output is typically a nation’s or region’s gross domestic product (GDP). In a labor productivity calculation, the input is the number of hours worked. Labor is not the only resource required for production, so total factor productivity calculations divide output by an aggregate of inputs, including land and capital. By using ratios like revenues/wages or volume/hours, the same concept can be applied to other contexts, from evaluating individual employees to assessing entire business sectors.

Labor charts

Broadly, much of today’s solid economic foundation can be traced to generations of continually rising productivity. Modern history is defined by technologies that changed our lifestyles and boosted our output. Electrification allowed for production through the night and enabled a host of new tools and technologies. Transportation saw a progression of multiple revolutions, from railroads to internal combustion engines and paved roads to commercial aviation. Farmland yields have never been higher. Telecommunications and information technology forever changed the way most businesses are run and managed. And improvements in healthcare have expanded the length and quality of our lives.

“Productivity is harder to measure in a service-driven economy.”

The current run of low productivity comes during an era that lacks a comparable technology breakthrough. The modern office, with workers at PCs or taking phone calls, looks much like it did thirty years ago, albeit with fewer walls and a looser dress code. Our smartphones are technological marvels, but they used for entertainment as easily as for business.

Some of the low productivity readings are due to measurement challenges. Productivity is harder to gauge as the economy shifts toward services. Consider healthcare: Continual innovation has improved patient outcomes. Hospital stays are shorter and less frequent, while the breadth and efficacy of medications continues to grow. However, pricing of medical services is opaque, and the value of health is difficult to quantify. In some cases, it is fair to say that productivity gains are visible everywhere but in the data.

Charts of investment spending and labor productivity

If productivity is to continue growing, it must happen through both broadening and deepening of capital. Broadening means increasing capital in tandem with growth in the labor force, allowing the use of existing technology at a wider scale. Capital deepening means investment in new technology to improve output per worker. In an office environment, broadening would mean placing a PC on every worker’s desk. Deepening would mean investments in worker training and new software to enhance the quality and speed of the work that they produce.