Why productivity is so important

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Popular Courses. Economy Economics. Key Takeaways Productivity is important in economics because it has an enormous impact on the standard of living. Higher productivity increases wages. Technology plays an important part in raising productivity. We must temporarily reduce consumption to make investments that will increase productivity and support more consumption in the future. Article Sources. Investopedia requires writers to use primary sources to support their work.

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Investopedia does not include all offers available in the marketplace. Related Articles. Economics Production in Command Economies. Economics Capital as a Factor of Production. Macroeconomics Is Industrialization Good for the Economy? Partner Links. Efficiency wages occur when employers pay higher than the minimum to attract skilled workers, boost productivity, and increase loyalty.

Productivity benefits are apparent and widely felt when implemented. Here are 7 reasons why productivity should be on your business agenda for When it becomes less expensive to produce goods and services, businesses experience an increase in profitability.

With more efficiency, less labour is required to produce these products and services. Through several initiatives, businesses can reduce operational cost. If employees improve individual workflow, they could either produce more in less time or reduce the number of hours they spend to achieve the same output. Operational cost can also be reduced with implementing technology. Another initiative is introducing flexitime or three-day weeks which increases productivity because employees feel more valued and engaged and experience less stress.

Better human resource management offers the opportunity to reduce costs and increase productivity through better role distribution and more effective staffing.

Improved workflow systems can identify overlapping roles, and the business can rectify situations where employees are not used to their full potential. More productive employees are more engaged. Engagement can often be linked to leadership, the amount of autonomy an individual feels and the degree to which they feel in control of their work and workload. When employees are organised, it usually leads to focus, commitment and engagement. To explain, if another worker can make 20 units in one hour, then this particular worker is said to be more productive than the former.

On the other hand, if a third worker can produce only 5 units in an hour, then that worker is said to be less productive than the other two. Thus, what we now get is a measure of individual productivity. As mentioned earlier, when the entire workforce is taken into consideration, then the average productivity is arrived at after taking the total units produced in an hour divided by all the workers in the plant.

So far, we have been dealing with time as the determinant of productivity. Turning to the contextual nature of productivity, there are some occupations such as Artisans and even Management Consultants and Investment Bankers as well as Software Professionals whose productivity has to be measured in the specific situation or the context of their profession.

What this means is that one cannot compare Apples to Oranges and hence, the productivity of varied professions is different and hence, one must also mention the time and the situational as well as contextual factors that determine productivity.

This is the reason economists have developed sophisticated models wherein the aggregate productivity of the entire workforce in say a country or a region is arrived after making allowances for the various determinants. It is also not the case that workers in different professions cannot be compared. Indeed, after making the allowances and adjustments to the models, economists usually have measures of the average productivity in each profession, and hence, this measure is widely used by corporates and nations to determine who is more productive or who is less.

Thus, this forms the basis of performance incentives and pay hikes as well as bonuses for workers and professionals, and this is the reason the measures of productivity are very important for them. Indeed, the fact that many management consultancies and investment banks often layoff the least productive employees after each appraisal cycle indicates the importance that they attach to the productivity measures.