# What Is Productivity and How to Measure It

> **Definition**
>
> Productivity affects corporate profits and shareholder returns and relies on individuals or organizations to maximize output.

## What Is Productivity?

Productivity compares the level of input with the output. The input may be labor, equipment, or money, and the output may be a good or service.

Economic productivity is calculated as a ratio of [gross domestic product](https://www.investopedia.com/terms/g/gdp.asp) (GDP) to hours worked. Labor productivity is analyzed by sector to identify trends in job growth, wages, and technological advances. A company's productivity can be seen in the number of units of a product produced relative to labor hours or by measuring [net sales](https://www.investopedia.com/terms/n/netsales.asp) relative to labor hours.

### Key Takeaways

*   Economists see productivity growth as essential for gains in wages, corporate profits, and living standards.
*   Productivity is calculated by dividing output by the units of input used to generate it.
*   Productivity in the workplace is how much work is completed over a specific period.

![Productivity: Measuring output per unit of input to gauge the efficiency of production.](https://www.investopedia.com/thmb/E2EusQ7j4XKFGQV110EKP_x5OoA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/productivity.asp_Final-4e5ae912293942689c1c3f395c60367b.png)

*In other words, productivity is a measure of how efficiently resources are used to create value. — Investopedia / Danie Drankwater*

## Maximizing Productivity

Economists see productivity as the key source of [economic growth](https://www.investopedia.com/terms/e/economicgrowth.asp) and competitiveness, whether it is being measured in a business, an industry, or a nation. A country’s ability to improve its standard of living depends on its ability to raise its output per worker. This may also include improvements in equipment, the production process, and the work environment.

Economists use productivity growth to model the productive capacity of economies and determine their [capacity utilization rates](https://www.investopedia.com/terms/c/capacityutilizationrate.asp). This, in turn, is used to forecast business cycles and predict future levels of GDP growth. Production capacity and utilization are also used to assess demand and inflationary pressures.

> **Important**
>
> According to a survey by the Federal Reserve, 33.5% of workers who used generative artificial intelligence (AI) every workday in 2024 said it saved them four hours or more of labor input time.

## Measuring Productivity

*   **Labor productivity**: Labor productivity is published by the [Bureau of Labor Statistics](https://www.investopedia.com/terms/b/bls.asp) based on the ratio of GDP to total hours worked in the economy. Labor productivity growth comes from increases in the amount of capital available to each worker (called capital deepening), the education and experience of the workforce (labor composition), and improvements in technology (multi-factor productivity growth).
*   **Total factor productivity**: Investment in plant and equipment, innovation, improvements in supply chain logistics, education, enterprise, and competition all affect productivity. The [Solow residual](https://www.investopedia.com/terms/s/solow-residual.asp) [](https://www.investopedia.com/terms/s/solow-residual.asp)is also known as [multi-factor productivity (MFP)](https://www.investopedia.com/terms/m/multifactor-model.asp), which measures economic performance by comparing the number of goods and services produced to the number of combined inputs used to produce those goods and services. Inputs can include labor, capital, energy, materials, and purchased services.
*   **Capital productivity**: Measures how efficiently physical capital is used to create goods or services. Physical capital includes tangible items such as office equipment, labor materials, warehouse supplies, and transportation equipment. Capital productivity is calculated by subtracting liabilities from physical capital, then dividing the sales number by the difference. A higher capital productivity number shows that physical capital is being used efficiently.
*   **Material productivity**: Measures output compared to the amount of materials consumed. Materials consumed can be heat, fuel, or chemicals used in the process of creating a product or service. It analyzes the output generated per unit of material consumed.

## Productivity and Investment

When productivity fails to grow significantly, wages, corporate profits, and living standards are limited. Investment in an economy is compared to savings because investments are financed from savings. Low savings rates can lead to lower investment rates and lower growth rates for labor productivity and real wages. When [savings rates](https://www.investopedia.com/terms/s/savings-rate.asp) in the U.S. are low, it may harm productivity growth.

Policies like [quantitative easing](https://www.investopedia.com/terms/q/quantitative-easing.asp) and [zero interest rate policies](https://www.investopedia.com/articles/investing/031815/what-zero-interestrate-policy-zirp.asp) (ZIRP) may encourage consumption at the expense of saving and investment. During periods of lax monetary policy where credit is accessible and affordable, consumers are more likely to incur debt and decrease their savings in pursuit of mortgages, loans, and other major purchases.

It is only when monetary policy is tightened and rates rise that the economy encourages saving and ultimately future investment. Companies can choose to spend money on short-term investments and share buybacks rather than investing in long-term capital. Sometimes economists call for corporate tax reform to incentivize investment in manufacturing, infrastructure, or long-term assets.

## Example

The calculation for productivity is straightforward: divide the outputs of a company by the inputs used to produce that output. The most regularly used input is labor hours, while the output can be measured in units produced or sales. If a factory produced 10,000 widgets last month while being billed for 5,000 hours of labor, productivity would be two widgets per hour (10,000 / 5,000).

Sales can also be used as a measure of output. In the same factory, let's say 10,000 widgets translate into $1 million in sales. Divide the $1 million figure by 5,000 labor hours to get the productivity number: $200 in sales for each hour of labor.

Auto manufacturing giant Toyota offers an example of a high-end productivity strategy. Its Toyota Production System (TPS) uses three principles: an environment of constant learning and improvement, standardizing systems for consistent quality, and the elimination of waste.

## What Is Productivity in the Workplace?

Productivity in the workplace refers simply to how much work is done over a specific period. Depending on the nature of the company, the output can be measured by customers acquired or sales closed.

## Is Productivity a Good Indicator of an Economy's Health?

Productivity is not necessarily a reliable indicator of the health of an economy at a given point in time. For example, during the 2009 [recession](https://www.investopedia.com/terms/r/recession.asp) in the United States, output and hours worked were both falling while productivity was growing. That is, hours worked were falling faster than output.

## What Factors Affect Productivity in the Workplace?

In the workplace, factors that affect productivity include compensation, work environment, training, career development opportunities, wellness, diversity, increased responsibility, and management quality.

## The Bottom Line

The concept of productivity is simple: at a given level of input, there is a given level of output. More productive societies and processes will yield more output at the same level of input. Whether viewed from an economic standpoint, a company standpoint, or a personal standpoint, measuring and tracking productivity is crucial to long-term success.

> **Article Sources**
>
> 1.  Federal Reserve Bank of St. Louis. "[The Impact of Generative AI on Work Productivity](https://www.stlouisfed.org/on-the-economy/2025/feb/impact-generative-ai-work-productivity)."
>     
> 2.  U.S. Bureau of Labor Statistics. "[Productivity](https://www.bls.gov/productivity/)."
>     
> 3.  U.S. Bureau of Labor Statistics. "[What Is Multifactor Productivity?](https://www.bls.gov/k12/productivity-101/content/what-is-productivity/what-is-multifactor-productivity.htm)"
>     
> 4.  Toyota. "[Toyota Production System](https://global.toyota/en/company/vision-and-philosophy/production-system/)."
>     
> 5.  National Bureau of Economic Research. "[Do Workers Work Harder During Economic Downturns?](https://www.nber.org/digest/dec13/do-workers-work-harder-during-economic-downturns)"