The significance of productivityProductivity is a measure of the economy's efficiency. It captures the amount of output a workforce creates per hour worked, so any time output grows faster than the amount of time worked, it means the economy is becoming more efficient. The real significance of productivity is that it has implications for both economic growth and inflation. Productivity tends to grow when economic growth is accelerating. When demand increases, businesses are pushed to operate at closer to full capacity, and growth in output usually happens faster than increases to the workforce. These things result in strong productivity gains. On the other hand, when productivity gains slow, it can be a sign that underlying demand has slowed unexpectedly, signaling trouble for economic growth. Looking back, a sudden drop in productivity in 2006 might have been a warning sign of the coming recession. Productivity gains averaged a very healthy 3.1 percent in the 10 years through 2005, but then dropped to 0.7 percent in 2006.
Productivity also has an influence on inflation trends. If output is rising faster than the hours worked, it indicates that efficiency is growing and this efficiency helps moderate price increases. Productivity growth can be a key to achieving strong economic growth without high inflation.