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Productivity, Wages and Prices - What's This About?

Written by: Leonard Scott

Article Overview: A company that consistently raises productivity can increase profits and wages while keeping prices stable so as to compete more effectively in the marketplace, build company value, and attract and retain the best people in the labor market. Focusing on consistent productivity growth is a most important aspect of management responsibility.

Productivity, Wages and Prices - What's This About?

At any time, but especially in the current recession, the importance of understanding the relationship between productivity, wages, and profits is of the utmost importance. The following chart clearly outlines this relationship:

Effect of an Increase in Productivity on Wages and Prices

Year 1 Year 2 % Change

1. Total Output 1000 1100 +10

2. Total Labor Input 500 500 —

3. Output per Labor Unit (1 divided by 2) 2.00 2.2 +10

4. Wage Rate (+ fringes) $ 1.00 $ 1.10 +10

5. Total Wage Cost (2 x 4) $500.00 $550.00 +10

6. Other Cost $400.00 $440.00 +10

7. Total Cost (5 + 6) $900.00 $990.00 +10

8. Price of Product or Service $ 1.00 $ 1.00 —

9. Total Sales Revenue $1000.00 $1100.00 +10

10. Profit (9 — 7) $ 100.00 $ 110.00 +10

This chart tells the company that if it has to raise wages to stay competitive in the labor market, but can't raise prices because of competition in the product market, it has to increase productivity and control costs in order to maintain or increase profits.

How can a company increase productivity and conrol costs? First, it can invest in the most modern equipment available. Second, it can review all indirect labor sources to see if any area can be cut back, eliminated, or outsourced or offshored at a lower cost. Third, output standards and manning schedules can be checked to see if they are correct. Fourth, overtime and other premium payments can be reviewed to determine if they are justified. Fifth, the causes of errors, waste, and poor scheduling and quality should be reviewed closely. Sixth, a general tightening up should take place throughout the company. Seventh, any additional operations that can be automated or eliminated should be. Eight, standards of performance should be established for all positions. Ninth, suggestions for improvements, innovations, and ways to increase sales should be soliticed from employees in a communications program telling them that all employees should consider themselves sales persons, customer service persons, operations persons, engineering persons, public relations persons, accounting and collections persons, recruiting persons, production persons, quality persons, IT persons, and strategic planning persons. Ideas for improvements and innovations in all these functions comming from all employees in the organization can result in major productivity improvements and increases in quality, customer satisfaction, employee motivation, pride in employment, company loyalty, and job staisfaction.

An organization that is motivated, well paid, lean, and characterized by new idea generation will always outperform competitive organizations without these qualities. Keeping a close eye on productivity and the elements that enable a company to keep productivity consistently rising is one certain approach to insuring the long term success of the organization.

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Article Tags: nbsp nbsp nbsp nbsp nbsp, productivity, profits, recession, understanding the relationship, utmost importance, wages, year 1



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