Technology People and Productivity - Productivity In A Nutshell

The government's productivity index — much in the news every month — measures output per hour of work. It is shown here for the Manufacturing sector as the bold line in the graph above. To simplify this measurement, all output from a sector, usually measured in dollars, is divided by all hours worked by employees, owners, and others (for instance spouses or children in a family-owned enterprise).

Productivity is a ratio. If output rises more than hours, productivity is up. If output drops but hours stay the same, productivity is down. This last condition often prevails in times of economic downturn: sales drop but employment responds more slowly. Therefore the same hours are divided into a smaller total output of goods or services.

The graphic shows some of the measures for Manufacturing in the 1992 to 2000 period. The index used shows 1992 as 100 for all the series; they all start at ground zero, as it were. Hours increased 3.4 percent, output increased 42.9 percent. If you divide the output index (142.9) by the hourly index (103.4), you get the productivity index (138.2); the small difference is due to rounding. In 1994, for instance, an output of 109, divided by hours at 104, produced a productivity index of 105.

Why is productivity so carefully watched? An important reason is that increases in compensation are dependent on productivity. If we produce more in an hour of work, we are likely to share in the increase. Note that, for Manufacturing in this period, compensation closely paralleled productivity; it grew 34.5%; Productivity grew 38.5%. Compensation grew more rapidly early in this period, more slowly later when, perhaps, fears of an economic slowdown, high inventories, and other factors possibly resulted in declines in overtime.

What elements influence productivity? Many factors do. One of these is automation. We shall look at technological factors soon. The next panel explores productivity for all of Business over a longer period of time.

Source: Bureau of Labor Statistics, U.S. Department of Labor, http://www.bls.gov/lpc/.