Word for Wednesday: productivity
In a vague sense, productivity means the ratio of outputs to inputs. Improvements in productivity arise from improvements in technology or new and better ways of organising production. Productivity can also decline if productive effort is diverted to wasteful ends, which may happen for a variety o reasons.
In m yexperience, most of the time, reported short-term changes in productivity are spurious, in a sense I’ll try to make more precise below. In thinking about this, I came up with the following proposed test/definition for an increase in productivity (it would also apply, with modification, to a reduction)
A change in productivity is sustainable if additional inputs of labour, capital etc could be added and would generate additional output at the new, higher level of productivity
The idea of this definition is to rule out as many as possible of the sources of spurious productivity gains, including
- factor composition biases, such as the gain in average productivity from closing the weakest plants in an industry/economy
- relative factor intensity biases, such as gains in labour productivity from an increase in the capital-labour ratio
- factor use intensity biases, such as labor hoarding during recessions and work intensification arising from microeconomic reform
The most famous case of factor composition bias was the Thatcher productivity miracle, achieved primarily through plant colsures. Factor intensity bias is a chronic problem, which has been addressed through the construction of measures of multifactor productivity. Increased work intensity was the main source of the Australian productivity miracle in the 1990s.
(Since miracles are invariably spurious, I’ve avoided putting scare quotes around the term.)