It’s not just about getting rich, it’s about quality of life – but how do you measure productivity? And why does it matter? | EXPLAINER
In an economic sense, productivity is a relatively simple concept – it is output divided by inputs.
Productivity can also be increased by working smarter. I send my workers to Widget University to get a degree in widget making. They come up with a new way to produce widgets, making 1200 from just nine boxes of steel.Mix capital deepening with human capital and you get what is called “multifactor productivity”. It means how you combine new technology with your workforce to boost your output.
The graph below gives you an idea of how much labour productivity has changed since the start of the 20th century. You might be someone who doesn’t measure their life by how much they produce. But you probably put a value on time not spent at work. Let’s illuminate this idea. People today live in a world of light. There’s so much light, economists use photos from space to determine which countries are growing richer.A key issue was not just the absence of electricity and lightbulbs but the sheer cost of producing light.
In productivity terms, the output is light divided by the input of wood and the 60 hours of labour needed to cut that wood. Two decades later, bulbs delivered five months’ light for the equivalent of that 60-hour week. And just before Nordhaus’ research, bulbs were giving a decade’s worth of light. Fluorescent bulbs give the same quality light for the equivalent of 52 years.
Instead, potential workers flocked to Detroit to work for Ford. Hours were also reduced, enabling the company to work three shifts a day.A Model T Ford in 1908 cost $US825. In 1925, they were being sold at $US260.While new technology and education have historically been the biggest drivers of productivity growth, they are not the only ways.
Former ACCC boss Rod Sims recently argued that from beer to airlines to banks, Australia simply doesn’t have enough competition to force companies to find ways to be more productive. And the pain felt by political parties would be due to the way the voting public reacted to proposals that would definitely cause economic turmoil for some parts of the population.Two areas of potentially large jumps in productivity are artificial intelligence and automation. Both tap into fears about technology and productivity that have been evident since the industrial revolution.
Without that technical breakthrough, all people would be poorer – both in terms of income and in the amount of time spent at work. Even if we are struck down by accident or disease, medical technology means we are a much greater chance of a full recovery.In our middle and elderly years, our quality of life is far superior to what it was even a few decades ago. When the age pension was introduced in 1909, the average life expectancy for a man was 58 years. Today, it is 82 for men and 85 for women.
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