2.1.2.2Why Study Productivity?

Productivity is considered as a fundamental economic measure. It is used as an indicator of the wealth of a country because most economists believe it is a critical determinant of the standard of living. It is obvious that producing more output with the same or fewer inputs is a significant source of increasing national product. Over time, developed countries have grown because they were able to produce more, not necessarily by working more, but most importantly by being more productive. Furthermore, labor productivity is a significant determinant of the standard of living because, theoretically, wages are equal to the marginal product of labor, which is closely related to productivity. Output per worker and wages are two measures of productivity, at the average and marginal level, respectively. Holding constant the percentage of the working population as well as hours of labor per worker, it follows that movements in per capita income must follow those in average output per worker. In other words, productivity is a long-term determinant of wages. Firms are willing to pay a wage that is commensurate with labor productivity and as it rises, so does the earning capacity of labor, increasing consumer buying power and, therefore, standard of living. Hence, increasing productivity will increase the standard of living. Conversely, a decrease in the relative growth rate of productivity will eventually lower the standard of living. This could be illustrated by what happened to the United Kingdom at the end of the nineteenth century. This country suffered lower per capita incomes during the extended period when output per worker decreased from 1870 to 1914.

Productivity is also viewed as an inflation indicator since it has an inverse relationship with unit labor cost. If unit labor cost increases for some reason, productivity decreases and inflation occurs through a higher price level. There is also a long-run productivity concept in neoclassical theory, associated with Alfred Marshall’s notions of increasing, constant and diminishing returns in various industries and more recently in various geographical areas.

Even though an increase in productivity growth generally contributes to reducing poverty in a nation, it will not reduce inequalities, because the market mechanism by which gains in productivity are distributed favors those who contributed the most to the increase. Productivity growth is also a necessary condition for a society to provide for its elderly because, without it, the nation would have to cut into the real incomes of the working-age population to prevent a decline in the living standard of the elderly. Moreover, if growth comes from higher productivity in terms of use of inputs, it can contribute to a better environment by producing more output without using more resources. Finally, gains in productivity at the national level are a necessary condition to remain an active player in today’s global competitive environment.