Activity 10b: A micro lens on productivity growth
- Productivity is a measure of the output that is generated from a given input. It can be measured in a number of ways but one of the most common ways is to divide the total production of an economy (or individual business) by the total hours worked (this gives a measure of labour productivity). Therefore it could be measured by real GDP per hour worked, but it also reflects an improvement in the quality of goods and services.
- Goods and services become cheaper in the face of higher labour productivity, for example, because there will be fall in the number of labour hours required to produce any given quantity of goods and services. Assuming that the cost of labour (e.g. wages) do not increase by exactly the same pace as labour productivity, then it leads to lower unit labour costs which can be passed onto consumers in the form of lower prices. In terms of the quality of goods and services, productivity enhancements may also involve any given number of labour hours producing better goods and services, such as those with fewer defects or those with greater functionality. For example, a business that trains employees to provide more valuable information/data to clients via the business website or an App. Alternatively, the training might involve the development of skills that enable employees to innovate and develop totally new products.
- Given that growth in productivity typically manifests in lower prices of goods and services over time as well as increases in average incomes, it means that purchasing power is enhanced in two ways. First, higher incomes enable workers to purchase more goods and services for any given level of income. Second, lower prices means at any given level of income can purchase a greater volume of goods and services. This is supported by the evidence produced in the table. For example, in relation to bicycles, Australians in 2019 we’re required to work only 9 hours to afford a standard bicycle, which compares 14 hours in the year 2000 and 473 hours in 1901.