Why is productivity so important?

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In this instalment of our Manufacturing FAQs we look at productivity. What it is and why everyone is talking about it.

Francesco covered some of this in a recent blog, so this is primarily a recap.

What is productivity?

Productivity is not reading this blog when you should be working...

When people talk about productivity they are typically referring to labour productivity, the amount of value a person helps to create in a set period.

This is usually measured as gross value added / hours worked.

Productivity growth results when either the amount of value created in an hour goes up, or the number of hours required to create the same amount of value goes down.

Manufacturers may of course measure productivity in different ways at the firm level, but the basic principle output measured against an input, is common across different approaches.

Why is productivity important?

The oft quoted Krugman line of "productivity isn't everything, but in the long run it is almost everything", is a must for any blog on productivity as it neatly sums up the issue of why productivity is so important to society.

In the short-run, issues with productivity growth won't have an immediate impact on profits, wages, tax revenues or other such things. It has however now been ten years of near zero growth in productivity across the whole economy and manufacturing.

Productivity-has-flat-lined 

The link between productivity and competitiveness

In the long-run however weak productivity erodes international competitiveness (the price we can get for goods on the world stage) against countries that aren't experiencing weak productivity growth. Also as Francesco put it:

In the long-run, advanced economies (including the UK) will need to deal with an increasingly ageing population and an extremely skewed old-age dependency ratio (the ratio between people in the workforce and those too old to work). Thus, doing more with less (people) is the key to keeping economic growth stable.

And with it wages. There being a strong correlation between rising productivity and rising wages. This is why everyone is talking about it (including it being a focus as part of the industrial strategy).

With productivity growth back in other countries, why is productivity so low in the UK? What can be done to get productivity growth back on trend? Our research work over the coming months aims to unpack this puzzle.

 

Author

Head of Business Environment Policy

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