Economics - Productivity

Productivity Notes: Online

Productivity is a measure of the efficiency of factors of production. This note will focus on measures to improve labour productivity as measured by output per person employed and output per person hour. Labour productivity is defined as the quantity of goods and services produced per unit of labour input.

Examples of policies

1. Increased government and private sector investment on infrastructure e.g. improve telecommunications (broadband) and transport networks to speed movement of people and goods and lower the cost of doing business
2. Expand the size of the capital stock and reduce the average age of capital by encouraging a higher level of business investment (inward and/or domestic) - for example through lower corporation tax or a sustained period of lower interest rates
3. Tax and welfare reforms to improve work incentives and increase the incomes from people working more productively
4. Improving the quality and affordability of education and training will increase its effectiveness at raising productivity - for example an expanded programme of apprenticeship schemes, better management quality, investment in STEM subjects
5. Improve access to and quality of health care to reduce sickness and absence which should increase output per worker
6. Facilitating inward migration of skilled labour to improve the quality of the labour force
7. Deregulation of markets to encourage stronger competition leading to greater efficiency e.g. increased competition in financial services, retailing
8. Measures to boost business start-ups and research and innovation which could all lead to higher productivity in the long run
9. Tax breaks on the use of new technologies and low carbon, energy efficient products
10. Government measures to increase bank lending to further increase investment and productivity
11. Encourage the uptake of the living wage or raise the national minimum wage - there is plenty of evidence that paying workers a better hourly wage improves their morale and can lead to improvements in output per hour worked.
12. Investment in making housing more affordable, this would improve the geographical mobility of labour and help transfer workers from one industry to another over time as the pattern of employment changes

Evaluation arguments

1. Productivity is determined by a mix of supply and demand side factors
2. Most productivity gains come from the private sector of the economy - the focus of policies should be on making businesses and markets more competitive
3. Productivity tends to rise as an economy recovers - so effective demand-side policies needed to sustain a higher level of aggregate demand to keep the level of capacity utilisation high
4. If economy has a low level of capital investment (as a share of GDP) and low research and development spending - this can hold back innovations and technological progress which might boost productivity in future years
5. A combination of policies may be more effective (e.g. fiscal incentives and supply side interventions)
6. Inevitable time lags and implementation lags - raising productivity closer to rivals will take more than one economic cycle

The economic cycle is the natural fluctuation of the economy between periods of expansion (growth) and contraction (recession). Factors such as gross domestic product (GDP), interest rates, levels of employment and consumer spending can help to determine the current stage of the economic cycle.