What Is Productivity?

What Do Computers Do to Productivity?

• It was said to me that the computers virtually don't increase the productivity. Is it true? Also a subquestion: what is the "productivity" in IT sector? When you use your program and one anoyther customer downloads your program, will your productivity increase twice? Is there a way how to measure productivity of IT sector?

• Answer:

  Let's start at the last question. What is productivity? Productivity (regardless of the industry) is value added per worker. Value added is the sum of wages (broadly defined, including benefits) and profits. In other words, productivity is how much money a worker makes for herself plus how much money she makes for her employer. So in your example, there is simply not enough data to even begin to reason about productivity. Productivity, however, is not the whole story. Sometimes, productivity can actually decrease because of the gains made by the consumer. Say, certain industry employs 1,000 workers, sells 1,000,000 widgets a year for $100 each and pays workers $40,000 a year on average. Cost of materials is $30 per widget. So value added by this industry is 1,000,000 * ($100 - $30) = $70,000,000, including $40,000,000 in wages and $30,000,000 in profits; productivity, thus, is $70,000,000 / 1,000 = $70,000. Now, let's say that the industry made some productivity gains in physical terms and now sells 1,100,000 widgets a year without any increase in labor employed, but prices dropped to $80 due to competitive pressures. So value added by the industry is now 1,100,000 * ($80 - $30) = $55,000,000, including $40,000,000 in wages and $15,000,000 in profits; productivity, thus, is $55,000,000 / 1,000 = $55,000. Note that although labor became more productive in physical terms, the productivity measured in monetary terms actually decreased; income to labor (wages) didn't change, income to capital (profits) decreased, but the consumer surplus increased (consumes got more widgets at lower prices). Now, replace widgets with airline seats, and you get the story of airline business. More people fly than ever before at prices lower than ever before (in many respects because comparison shopping is easier than ever before), so wages stangate while profits shrink. Another story is a little more complicated, but let's try it anyway. You have a skilled worker earning $60,000 a year producing 600 widgets a year; wage is the only expense in producing this particular widget. The worker's employer sells the widgets for $120 a pop, at $20 above the cost. Since wage is the only expense, productivity equals revenue: $120 * 600 = $72,000. Now, let's say the employer leases a machine for $2,000 a year and hires a semi-skilled worker for $40,000 a year to produce the same number of widgets, 600. So now a widget costs only $70; the employer decides to increase the mark-up to $30 and sell the widget at $100. What's the prodictivity now? $40,000 + $30 * 600 = $58,000. In this example, consumers still gained through lower prices, capital gained through higher profits, but skilled labor lost jobs, while semi-skilled labor gained jobs. Replace widgets with bank loans, and you'll understand what happened in large banks; experienced (and expensive) loan officers were replaced with a combination of straight-out-of-collede hires and computer models for default prediction and credit pricing. Here are a couple more facts for you to ponder... Before 1990s, investment in buildings would be about 4% of GDP during economic booms, falling to 2.5% of GDP during slumps. During the boom of the 1990s, it never exceeded 3%. The industry didn't need to build as much factories and warehouses because it had ERP software that allowed it do do more with less. Same thing happened with inventories. Traditionally, inventory of consumer durables nationwide would be kept at about 25% of annual sales during booms and drawn down to about 12% during slumps; in 1990s, it never exceeded 16%. This is a direct effect of computerized inventory control. Companies need less inventory per unit of sales.