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Productivity refers to how efficiently the factors of production are being used.scarce resources are being used. Productivity levels have a significant impact on an economy, and how effectively it performs in terms of meeting its macro-economic objectives.

Measurement of productivity

There are two basic ways in which productivity can be measured:

  1. Output per worker  - the value of an economies output/workforce

  2. Output per hour worked - the value of output/toal amount of hours worked)

Marginal productivity refers to the additional poutput products from additional inputs of labour (or other factors).


Video courtesy of ONS

Changes in UK productivity


Determinants of productivity

Labour productivity is affected by:

  1. The level of skills and the quality of training - better skills and training enable workers to exploit their talents and abilities and produces higher quality labour.

  2. The use of new technology - the use of technology is important in determining the level of productivity in manufacturing industries.

  3. The extent of innovation in new of new production methods or processes.

  4. The transfer of knowledge and technology between countries through open trade relationships and foreign direct investment between countries.

  5. The level of unemployment - as unemployment falls, less productive workers may be attracted into the labour market.

  6. The level of competition in an economy - more competitive economies encourage the improvement of productivity as this helps improve competitiveness.

Measures to improve productivity

Measures to improve productivity include:

  1. Use of the tax system to provide incentives for unemployed workers to join the labour market, or to gain new skills.

  2. The promotion of greater competition in labour markets, through the removal of restrictive practices, and labour market rigidities, such as the protection of employment.

  3. Measures to improve labour mobility will have a positive effect on labour productivity.

  4. Improvement in the education system to develop general skills of numeracy and literacy, and to promote flexibility - called human capital development.

  5. The adoption of performance-related pay in the public sector is also seen as an option for government to help improve overall productivity.

  6. Providing grants, subsidies or tax incentives or credits to firms to upgrade their technology or engage in effective R&D.

  7. Deregulation of product markets and removal of unnecessary bureaucracy which can bring down barriers to entry, and encourage new and dynamic market entrants.