Productivity
Output per hour worked. In the long run it is the only thing that makes a country richer, and almost nobody can explain why it speeds up or slows down.
A country can produce more by working more hours or by producing more per hour. The first has a hard ceiling. The second does not, and over decades it is the entire story of why some places are rich.
The two measures
- Labour productivity — output per hour worked. Simple, measurable, published regularly.
- Total factor productivity — the part of output growth not explained by more labour or more capital. Effectively a residual: the efficiency with which inputs are combined.
The second is the more interesting concept and the less reliable number, because a residual absorbs every measurement error in everything else.
At 2% annual productivity growth, output per hour doubles in about 35 years — within a working life. At 1%, it takes about 70 years — two generations. Same country, one percentage point, and the difference is whether children are twice as well off as their parents or the same.
Where it comes from
- Capital per worker. Better tools. Straightforward, and subject to diminishing returns.
- Human capital. Education, skills, accumulated experience.
- Technology. New methods rather than more of the old ones. The largest long-run contributor.
- Allocation. Resources moving from less productive uses to more productive ones — which requires that unproductive firms be allowed to shrink.
- Institutions. Contract enforcement, competition, infrastructure. Invisible when present and decisive when absent.
The connection to wages
A worker cannot be paid more than they produce for long, so productivity caps sustainable real pay. Whether pay actually tracks that ceiling depends on bargaining power, labour market tightness and competition. In several advanced economies, measured productivity and median real wages diverged for extended periods — a genuine and heavily studied gap, with contested explanations including measurement, composition effects and the share of income going to capital. See wage growth.
Why the recent record is puzzling
Measured productivity growth in advanced economies slowed after the mid-2000s, during a period of visible technological change. The candidate explanations are all partially convincing and none is settled: mismeasurement of digital output, weak business investment, slowing diffusion from leading firms to the rest, the shift toward services where productivity gains are genuinely harder, and the possibility that recent innovations simply change fewer processes than electricity did.
The measurement problem
Productivity requires dividing output by hours, and output requires pricing things. A free service used by billions contributes little to measured output. Quality improvements at a constant price register as no growth unless statisticians adjust for them, and those adjustments are contested. Public services are often valued at cost, which makes improving them statistically invisible.
Why investors care
Productivity growth determines the sustainable growth rate of the economy and therefore the long-run path of corporate earnings. It also determines how much wage growth an economy can absorb without inflation, which is what central banks are implicitly assessing when they talk about the neutral rate. See the Phillips curve.