productivity

Two farmers work the same number of hours. One uses a hand hoe and harvests a few sacks of grain; the other drives a modern tractor and harvests a truckload. The difference is productivity: how much output you get from a given amount of input. It is, in the long run, the single most important determinant of how wealthy a country can become and how high its wages can rise.

The most common measure is labour productivity, output per hour of work or output per worker. If an economy produces 1000 units of output using 250 hours of labour, labour productivity is 1000 divided by 250, which is 4 units per hour. Productivity rises when workers get more and better tools (more capital per worker), more skills and education (human capital), better organisation, and above all better technology and know-how. Crucially, higher productivity is what lets pay rise without simply pushing up prices: if each worker produces more, there is more to go around. As economist Paul Krugman put it, productivity is not everything, but in the long run it is almost everything.

Productivity matters because it is the deep source of rising living standards. A country cannot keep getting richer just by adding more workers or working longer hours; those have limits and bring diminishing returns. Lasting prosperity comes from each hour of work producing more. This is why productivity growth, and the puzzling slowdown in it across many rich countries in recent decades, is one of the most debated questions in economics, with no fully settled answer.