Gross domestic product (GDP) numbers are commonly used to assess the overall health of a country's economy. But a closer look reveals that productivity improvements are the main source for sustainable economic growth.
GDP per capita is a familiar proxy for how well a county's economy is performing. But GDP per capita is actually a product of two factors: employment levels (the percentage of the labor force actively engaged in economic activities and the average working time) and labor productivity (the output produced per unit of labor).
Employment levels differ across countries and through time, but the potential to increase employment levels is naturally limited. Furthermore, increased employment levels only will lead only to a one-time upward shift in GDP.
For GDP per capita to grow in a sustainable manner, therefore, labor productivity must rise. When a company increases its output per unit of labor, it can pay workers higher salaries, retain higher profits, and/or reduce prices. This surplus will be channeled back into the economy through increased consumer spending, higher exports, and/or more business investment. As a result, increases in productivity increase GDP.
Higher productivity not only directly increases national welfare, it also improves the competitiveness of companies and national economies, allows for growth without inflation, and creates a financial platform for social spending. Productivity is – in the long run – the only sustainable engine for job creation.
