Human Input: The Core of Productivity

Perhaps the most important determinant of the standard of living in a country is its economic and industrial productivity: the efficiency and effectiveness with which it utilizes its resources at the national and the firm level. 

Although productivity is normally defined as the ability to combine and convert inputs of labor, material, capital, and other resources into goods and services; the human input (labor, technician, and manager) plays a central role in this process. This is due to the fact that such resources as capital, materials, and energy cannot in themselves produce anything ‑ the human input is needed to plan, organize, integrate, and activate the overall production process. 

Relative differences in standards of living among nations are often used to compare differences in labor productivity, because differences in the latter are the major determinant of differences in per capita output. In turn, the rate of growth in output per capita or standard of living in a country depends mainly on two factors: (a) the rate of economic growth, and (b) the population growth rate. Economic growth requires an increase in resources utilized for production of goods and services, and/or using resources more productively. Figure 1 illustrates growth trends among selected countries. 

Does Productivity Improvement Lead to Loss of Jobs? 

It can be safely asserted that productivity improvement programs should focus on workers and aim at securing worker commitment in order to be successful. However, there is a major dilemma in this connection. Workers and unions are typically apprehensive about productivity enhancement efforts of management in that they think such programs ultimately result in retrenchments and reductions in the number of jobs available.

This belief is in most cases not well‑founded. For one thing, productivity improvements aiming at better utilization of such non‑labor inputs as capital, material, and energy would normally enhance a firm's market status and strength, and likely enable it to raise its productive capacity. Secondly, in today's intensely competitive global industries, firms face serious domestic and international pressures. If partial retrenchment becomes necessary for a company that would otherwise be forced into liquidation, saving the remaining jobs is a healthier alternative for workers than losing all. Finally, productivity improvements leading to a smaller work force can also be accommodated by reduction in work hours or work days, as long as improved productivity gives the enterprise the financial viability to do so. 

In the United States, for example, the annual increase of 3.9 percent in manufacturing labor productivity during the 1980‑1986 period was accompanied by a very slight decline of 0.8 percent in manufacturing employment, (Figure 2). In Japan, on the other hand, the very high rate of productivity increase achieved during the same period (5.8 percent) generated a 1.4 percent employment growth, rather than an employment decline. In all other countries included in this analysis, labor productivity increases were considerably greater than unemployment increases. These observations suggest that (a) the problem of potential employment declines associated with productivity improvement programs should not be exaggerated, and (b) today's management and unions facing serious competitive threats to their enterprises should work collectively to explore ways to improve productivity of the work place while trying to alleviate the unemployment problems that might result from productivity enhancement efforts. 

Wage Levels and Employment

One important issue that should be seriously noted both by management and workers relates to the generally inverse relationship between earnings in the manufacturing sector and employment levels in different countries. This issue is very important because it clearly demonstrates that productivity improvement efforts are not generally the main cause of employment declines. As can be observed in Figure 3, in all the countries where average hourly earnings increased by in excess of 5 percent, employment declined during the 1980‑1986 period. Japan is the only country in this group which had an average annual wage increase of less than 5 percent (4.3 percent) where employment grew 1.4 percent annually. This observation suggests that excessive wage increases can in most cases become a serious impediment to employment growth. 

Labor Productivity ‑ Nominal and Real Wages 

Labor productivity trends achieved in the manufacturing sector of selected countries between 1975‑1986 are reflected in Figure 4. It should be noted that these indices do not show relative productivity levels among these countries, but only the changes in labor productivity since 1975 for each country.

In terms of labor productivity, Japan recorded a 91.8 percent improvement over the eleven year period between 1975‑1986, this compares quite favorably to the 35.6 percent improvement in the USA. Similarly, France, Germany, and Britain achieved labor productivity gains (59.2 percent, 45.8 percent, and 45.2 percent, respectively) larger than those of the United States, (Figure 4). In nominal terms increases in earnings per employee in manufacturing were relatively high for South Africa (352.1 percent), Britain (265.3 percent) and France (257.2 percent), as compared to only 86.8 percent in Japan, (Figure 5).