Box A. The Importance of Productivity
Productivity increases translate to lower cost per unit, which typically results in lower prices for consumers—particularly when there is industry competition. Thus, productivity increases improve the standard of living as lower prices allow consumers to purchase more per dollar of income—with other factors remaining constant. Productivity increases can also mean higher profits for the transportation companies and higher labor compensation. There are two main measures of transportation productivity—labor productivity (single-factor) and multifactor productivity.
Such measures are critical to assessing how effectively we are enhancing the performance of our transportation system.
Single-factor v. Multifactor Productivity1
The ratio of output to the most critical input is the most basic measure of productivity. In car manufacturing, for example, productivity can be measured as the ratio of cars produced (the output) to the number of hours worked (the input). This type of productivity measure is known as labor productivity—the most commonly used single-factor measure of productivity. In agriculture, a productivity measure might be the ratio of bushels of wheat (the output) to acres planted (the input). This single-factor measure is know as land productivity. In single-factor productivity measures, other inputs, such as capital or fertilizer used, are not considered.
However, such single-factor-based measurements are limiting because in industries there are often several productive factors of near equal importance, and the relative importance of these inputs may shift over time. For example, if the labor force shrinks, the relative importance of skilled labor to other inputs may become critical.
Multifactor productivity sidesteps this problem because the combined productivity of all inputs are measured. Simply put, multifactor productivity is the productivity of all inputs, where the weights used to estimate the contribution of each input to output are their shares in the total cost of production.
1 Adapted from David T. Owyong, Productivity Growth: Theory and Measurement, APO Productivity Journal, http://www.apo-tokyo.org/productivity/016_prod.htm as of July 29, 2003.