Productivity measures the efficiency with which an economy transforms inputs into outputs. The Productivity of Labour is the value added per hour worked. That is, Productivity has gone up if more is produced with the same number of hours of labour, or the same amount is produced in less working time. For example, an electrician who can wire a new house in a day is three times as productive as an apprentice who takes three days to do the same house to the same standard.
Labour Productivity is calculated by dividing the Gross Value Added by the hours worked, and so is measured in euro per hour. The change in Productivity over time and the differences in Productivity between countries can show us how well a national economy is doing.
The production being measured may be goods, like bicycles or beer, or services like transport or healthcare.
Value added might increase without any extra hours worked because new technology has improved the production process. For example, a new machine in a factory might allow production to increase without any change in the workers’ hours. The availability of new machinery or other Fixed Assets is called ‘capital deepening’.
Productivity might also increase because workers are more efficient, more highly trained or better organised. This is called ‘Multi-factor Productivity’. It is important to see the role of capital and Multi-factor Productivity to understand what is really driving changes in the Productivity of the economy.