Productivity gains

Productivity gains refer to benefits when labor productivity increases. This term applies to companies and the economy.

We measure labor productivity by dividing output – for the economy, represented by gross domestic product (GDP) – to the number of labors used to produce the output. For example, when the output per worker of a country rises from 100 units per worker to 120 units per worker, the country makes productivity gains.

Determinants of productivity gains

Increased productivity is an essential source of economic growth, not only in the short term but long term. When the workers in the business sector are more productive, they can produce more output using the same input. And if productivity improvements occur across the labor force, aggregate output rises faster and spurs economic growth.

Of course, businesses will be encouraged to increase productivity and output as there is a market that absorbs it. If it does not exist, an increase in output will only result in excess supply, causing prices and profit margins to fall.

Technological progress is a critical factor for increasing labor productivity. In the past, writers needed a couple days to produce articles with typewriters. Now, it can be faster by using a computer and can even be done anywhere using a smartphone.

That is why many businesses regularly invest in capital goods. In addition to replacing outdated machines, they can also buy technologically more sophisticated and more efficient machines, enabling their workers to be more productive.

Productivity also increases with specialization in work. Workers can adapt and learn more quickly when their scope of assignments is less. Experts capture this phenomenon and describe it through the learning curve.