Definitions and Basics

Productivity, from the Concise Encyclopedia of Economics

Productivity—the amount of output per unit of input—is a basic yardstick of an economy’s health. When productivity is growing, living standards tend to rise. When productivity is stagnating, so, generally, is well-being….

Productivity can be defined in two basic ways. The most familiar, labor productivity, is simply output divided by the number of workers or, more often, by the number of hours worked. Output can be anything from tons of steel to airline miles flown, but more generally it is some very broad aggregate like gross domestic product. Measures of labor productivity, however, actually capture the contribution to output of other inputs than hours worked.

Total factor productivity, by contrast, captures the contribution to output of everything except labor and capital: innovation, managerial skill, organization, even luck….

Productivity Video and Quiz, at EconEdLink.

Productivity Lesson Demonstration, at EconEdLink.

Standards of Living and Modern Economic Growth, from the Concise Encyclopedia of Economics

To see how much more an American worker can buy today, compare the number of hours he would have had to work to obtain various items in 1895 versus 2000 (Table 1). Whereas a one-hundred-piece china set would have taken 44 hours of labor income in 1895, a twenty-first-century American would need to work 3.6 hours or less for it. The numbers are 28 versus 6 hours, respectively, for a gold locket; and 260 versus 7.2 hours for a one-speed bicycle (taken from De Long 2000, based on prices in the 1895 Montgomery Ward catalog). Comparing the prices charged in the Montgomery Ward catalog with prices today—both expressed as a multiple of the average hourly wage—provides an index of how much our productivity in making the goods consumed back in 1895 has multiplied.

In the News and Examples

The Wheat Activity, at Foundation for Teaching Economics.

In this simulation students are workers producing wheat.  The students will use their available capital (pencils) to produce wheat by writing the word “w-h-e-a-t” as many times on the piece of paper (land) as possible in a given time period.  Each round more students are added to each team which will slow down production and show how even as total product increases the marginal productivity of workers does not increase at that same rate.  Students will use this activity and marginal decision making to understand how companies make decisions to hire based on marginal productivity.

Is Bethlehem Steel the Canary in the Economic Mine Shaft?, by Russ Roberts. Econlib, Nov. 1, 2001.

The underlying explanation for the drop in employment in the steel industry over the last half-century is an increase in productivity—the industry gets more done with fewer people. America is not the only nation with less employment in the steel industry. World steel employment is roughly a third of what it was 25 years ago. Virtually all of the steel producing nations, even the ones who allegedly dump their steel on U.S. markets, have fewer people making steel than they did 25 years ago. But world output of steel is up….

Remittances and the Latin American Dream, by Ibsen Martinez. Econlib, Apr. 3, 2006.

As his very illuminating book shows, and contrary to what used to be conventional wisdom pertaining German and Japanese economies, U.S. workers achieve the highest productivity in the world in most economic sectors. Obviously, this also applies to immigrant workers, illegal or not, whose countries of origin are plagued by all kinds hindrances to individual initiative and legitimate ambitions of affluence. Viewed this way, immigrant remittances are a trustworthy index of hard work, thrift and family devotion….

Discrimination, from the Concise Encyclopedia of Economics

When business discriminates against individuals on any basis other than productivity, market mechanisms impose an inescapable penalty on profits….

A Little History: Primary Sources and References

Advanced Resources

Related Topics


Economic Growth

Economic Development