Productivity

What Is Productivity?

Productivity measures how much output is produced from a given amount of input. The most common inputs are labor, meaning hours worked, and capital, meaning machinery, equipment, and buildings. Productivity can be measured for a single worker, a company, an industry, or a whole national economy, where it is often expressed as gross domestic product (GDP) per hour worked.

How It Is Measured

Labor productivity is the simplest version:

Labor productivity = Total output ÷ Hours worked

Multifactor productivity goes further by combining several inputs, such as labor and capital, into one measure. Because it accounts for changes in inputs, economists use it to estimate how much of output growth comes from better technology, improved management, or more skilled workers. For example, if a small factory makes 1,200 units in a 40-hour week and produces 1,320 units the next year with the same hours, its labor productivity rises from 30 to 33 units per hour, an increase of 10 percent.

Why It Matters to Investors

Over long periods, productivity growth is one of the main sources of economic growth and rising living standards. For companies, rising output per worker can improve profit margins if costs grow more slowly than sales. Economists also watch productivity closely because it helps explain how much wages can rise without pushing up inflation. When output per hour grows at about the same pace as pay, unit labor costs stay stable.

Productivity data has limits. Official figures are often revised, output in services and intangible goods is difficult to measure, and a single quarter's reading can be distorted by the business cycle. Investors usually look at trends over several years rather than one release.