Why productivity is rising. Or falling. Or both

Productivity measures are key parameters of an economy’s health, yet economists disagree about which measure is best

When examining productivity in aging societies in a recent series, PROJECT M relied on standard measures of output. Describing the quantity of goods and services produced per worker or per hour and defined as a ratio of output versus input, productivity should be a straightforward affair. But economists remain divided about how best to measure it.

Confusion arises because of a diversity of measures. First comes single factor productivity, which relates a measure of output to a single measure of input. Multifactor productivity, meanwhile, measures the changes in output per unit of combined inputs. For example, if you give a worker a better machine, then output per man-hour goes up. Unfortunately, this is hard to measure; it is far easier to add up the number of hours worked instead.

Next comes labor productivity, which can be defined as “the ratio of a volume measure of output to a volume measure of input,” according to the Organisation for Economic Cooperation and Development (OECD) in its manual on measuring productivity.

Labor productivity has a lot in its favor. Easy to measure, it is a key determinant of living standards, measured as per capita income and is easy to grasp. But it only partially reflects the intensity of workers’ efforts.

And then there is KLEMS. This relates gross output to primary (capital, labor) and intermediate inputs (energy, other intermediate goods, services).

Last but not least comes capital productivity. Easily the most difficult to grasp, it relates capital income to the value of the entire capital stock.

Confused yet? The good news is that standardized methods might yet be introduced. A number of organizations, including the OECD, the Groningen Growth Centre and the International Labor Comparisons Program already adjust data to make international comparison easier. The World KLEMS initiative, meanwhile, sets out to ease the analysis of growth and productivity patterns by building global databases on output, input and productivity at an industry level.

Why productivity is rising. Or falling. Or both

Productivity measures are key parameters of an economy’s health, yet economists disagree about which measure is best

Why productivity is rising. Or falling. Or both

Productivity measures are key parameters of an economy’s health, yet economists disagree about which measure is best

Where have all my colleagues gone?

How women save our wealth

Reducing underemployment offsets economic decline

Thinking beyond 65