Productivity Growth
How productivity grows: machines, skills, and innovation
Productivity isn’t just about working harder; it’s about working smarter. Imagine a bakery that bakes 100 loaves a day with two bakers. If they buy a new oven that lets them bake 150 loaves without extra hands, their productivity has grown. There are three main engines of productivity growth:
- More (and better) capital: This means better tools, machines, and buildings. A farmer with a tractor produces much more per hour than one with just a hoe.
- Improved technology: New methods and inventions, like assembly lines or computer software, allow faster and higher-quality production.
- Human capital: Education and training make workers more skilled. A trained mechanic fixes an engine in half the time of an amateur.
Measuring productivity: simple formulas and a table
We often measure productivity as output per hour worked. If a factory produces $10,000 worth of goods in 500 hours, productivity is $20 per hour. The formula is: $Productivity = \frac{Total\ Output}{Total\ Input}$. The table below shows a simple example of two car factories:
| Factory | Workers | Hours per day | Cars per day | Cars per hour |
|---|---|---|---|---|
| Standard Motors | 50 | 8 | 20 | 20 / (50*8) = 0.05 |
| Auto Innovators | 40 | 8 | 24 | 24 / (40*8) = 0.075 |
Auto Innovators has higher productivity because its workers produce more cars per hour. This could be due to robots, better training, or a smarter layout.
A real-world example: the amazing productivity of a modern farm
In the year 1900, a US farmer fed about 7 people. Today, thanks to productivity growth, one farmer feeds around 155 people! Let’s see why:
- Tractors and harvesters replaced horses and hand tools (capital deepening).
- Better seeds and fertilisers (technology) made each hectare produce much more grain.
- Scientific farming methods (human capital) like crop rotation and GPS-guided planting.
Important questions students ask about productivity growth
A: Sometimes, yes, in the short run. When a factory automates, some jobs may disappear. But in the long run, productivity growth creates new jobs in different industries. For example, when farming became more productive, workers moved to factories. Later, factory automation led to more jobs in services and technology. It also makes goods cheaper, so people have money to spend on new things, creating new kinds of work.
A: Governments and businesses can invest in three areas: 1) Infrastructure (roads, internet) — good infrastructure lowers costs for everyone. 2) Education — skilled workers are more productive. 3) Research & development — new ideas lead to better technology. Encouraging competition also pushes firms to innovate.
A: Not exactly. Working faster might mean more mistakes or burnout. Real productivity growth comes from better methods, not just speed. For example, a writer who uses speech-to-text software can “write” three times as many words in an hour without typing faster. That’s a productivity gain from technology, not from hurrying.
Footnote
[1] Capital: Human-made goods used to produce other goods and services, like machinery, tools, and buildings.
[2] Output per unit of input: A measure of efficiency, often calculated as output per worker or output per hour worked.
[3] Human capital: The skills, knowledge, and experience of workers, which increase their ability to produce.
[4] R&D (Research and Development): Work directed toward innovation, introduction, and improvement of products and processes.