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Interpreting Productivity Rate

Jan 20, 2008
Productivity rate is an important economic concept that measures the efficiency of a production process which is basically the transformation of inputs into certain outputs. It may be affected by factors such as technological advancements, change in firm size and other changes in the organizational structure.

Some economists simply define productivity as the ratio of the return or output to the investment or input. Inputs of production may be material or immaterial. These pertain to the factors of production which are labor, energy, capital, services and raw materials. These are combined through the production process to create tools for consumption. Output, on the other hand, pertains to the number of services and goods that result from production. Productivity is not the same as production output although they may be related. In fact, gains in productivity may be obtained even without an increase in output if inputs are utilized efficiently.

Productivity can be measured in two ways. It can be measured by using a combination of all factors of production or it can be measured from the standpoint of one production factor alone. When all production factors are considered, it is called multifactor productivity. When only one productivity factor is measured, it is called partial measure of productivity. Among all partial measures, labor productivity is the most frequently used. Multifactor productivity refers to the output per unit of a combination of all production factors. On the other hand, labor productivity refers to the output per hour worked. In terms of data, it is more demanding to measure multifactor productivity. This is because sufficient data on output and input volume and value would have to be obtained. A method to aggregate all production factors into a common index may also have to be devised.

According to economists, there are three ways to improve productivity. This can be done by increasing the output rate on the same input rate or it could be done by reducing the input rate on the same output rate. The same is also the result when the cycle time, or the time needed to complete a process or a sequence, is reduced on the same productivity rate. Productivity gains stand to benefit a lot of people. They will translate to wage increases and increased purchasing power of workers. They will also mean higher profits for businesses and higher tax revenues for the government. Aside from increasing profits for businesses, productivity gains will also mean an increased competitiveness for them because it reflects the correlation between prices of resources or inputs and productivity.

Several productivity studies have already been undertaken to identify ways on how to increase the productivity rate of organizations. It has been revealed from these studies that efficiency or the value of output vis a vis the input costs, has a tremendous effect on productivity. In addition, these studies revealed that automation and computerization have allowed companies to increase their productivity. Social experiments conducted also revealed that steps undertaken by companies to make the working environment more comfortable such as air-conditioning systems, ergonomic designs, influenced their employees to be more productive.
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